ON TARGET. FULL SPEED AHEAD.

TARGET CORPORATION ANNUAL REPORT 2003

2003 2002 2001 2000* 1999

Operating Results (millions)

Total revenues $48,163 43,917 39,826 36,851 33,657

Pre-tax segment profit $ 3,734 3,461 2,965 2,682 2,523

Net earnings $ 1,841 1,654 1,368 1,264 1,144

Per Common Share Data**

Diluted earnings per share $ 2.01 1.81 1.50 1.38 1.23

Cash dividends declared $ .270 .240 .225 .215 .200

At Year-end (millions, except Number of stores)

Common shares outstanding 911.8 909.8 905.2 897.8 911.7

Retail square feet 188.6 176.5 161.6 149.4 139.4

Number of stores 1,553 1,475 1,381 1,307 1,243

*Consisted of 53 weeks.

**Earnings per share, dividends per share and common shares outstanding reflect our 2000 two-for-one common share split.

The Financial Highlights should be read in conjunction with the Notes to Consolidated Financial Statements throughoutpage 30-39.

01 Report to Shareholders

04 Strategy Discussion

17 Financial Review

42 Shareholder Information

Net Earnings(millions)

Pre-taxSegment Profit(millions)

Financial Highlights

Revenues(millions)

DilutedEarnings perShare

’99 ’00 ’01 ’02 ’03

$3

3,6

57

$3

6,8

51

$3

9,8

26

$4

3,9

17

$4

8,1

63

45,000

37,500

30,000

22,500

15,000

7,500

’99 ’00 ’01 ’02 ’03

$2

,52

3

$2

,68

2

$2

,96

5 $3

,46

1

$3

,73

4

4,000

3,000

2,000

1,000

’99 ’00 ’01 ’02 ’03

$1

,14

4

$1

,26

4

$1

,36

8 $1

,65

4

$1

,84

1

2,000

1,500

1,000

500

’99 ’00 ’01 ’02 ’03

$1

.23

$1

.38

$1

.50

$1

.81 $2

.01

2.00

1.50

1.00

0.50

1

To Our Shareholders

For decades, Target Corporation has been guided byprinciples, and devoted to strategies, that are intendedto enhance our long-term financial performance andsuccess. We have maintained a steadfast commitmentto initiatives that fuel consistent growth over timebecause we believe that managing our business this way continues to generate substantial value for our shareholders.

At Target Stores, which now represents more than

90 percent of our total pretax segment profit, our vision

is clear and unwavering, reinforced by the strength and

consistency of our financial results and the power of

our brand. Target continues to enjoy strong market

share gains and significant increases in profitability.

At Mervyn’s and Marshall Field’s, our path is less

clear. In March, we announced plans to review strategic

alternatives for both of these divisions, including, but

not limited to, the possible sale of one or both divisions

to existing retailers or other qualified buyers. Arriving

at this decision was not easy or hasty. We have dedi-

cated significant effort to increasing sales and profits

at Mervyn’s and Marshall Field’s over many years and

we continue to believe that both of these businesses are

valuable as ongoing operations. Mervyn’s and Marshall

Field’s have been important contributors to Target

Corporation’s overall strategy and financial performance

for decades—providing fashion leadership, manage-

ment talent, and financial services expertise as well as

significant cash flow that has allowed us the luxury of

simultaneously pursuing terrific growth opportunities

for our Target Stores division, while maintaining both

a balanced capital structure and strong investment

grade debt ratings. Additionally, these businesses have

provided critical scale benefits to the Corporation,

allowing us to leverage our fixed costs across a much

larger retail organization. In recent years, however,

both of these divisions have experienced considerable

challenges to their top-line growth, resulting in unfavor-

able trends in their financial performance. While each

of these businesses continues to generate meaningful

profits and substantial positive cash flow, the absolute

amounts are much lower than their historical levels.

As stewards of the Corporation’s assets, our senior

management team and our Board of Directors remain

intently focused on our responsibilities to our share-

holders, our team members, our guests and the

communities we serve. While we believe that it is

appropriate to identify and evaluate possible strategic

alternatives for Mervyn’s and Marshall Field’s, it is not

clear that our review will result in either division being

sold. Despite this uncertainty, we remain confident that

Target Corporation is well-positioned to build on our

record of outstanding performance and to generate

profitable growth and superior shareholder value in

2004 and well into the future.

2

In 2003, Target Corporation delivered $2.01 in earn-

ings per share, reflecting another year of double-digit

growth, primarily due to contributions from Target’s

merchandise operations and the Target Visa portfolio.

These contributions reflect continued strategic invest-

ments in our business that reinforce and enhance our

brand and increase our guests’ satisfaction. For example:

• To provide greater guest convenience, Target con-

structed 101 total new stores during 2003. Net of

relocations and closings, this store opening program

included 54 net new discount locations and 24 new

SuperTarget stores, amounting to 12.3 million net

new square feet, an increase of 8.8 percent.

• We refined our emphasis on “Wants and Needs”

within our merchandise assortment and our market-

ing campaigns in order to give our guests more

reasons to shop at Target more often and to generate

higher sales.

• We added more new distribution capacity than we

have ever added in a single year—four new regional

distribution centers and two new import warehouses

—to improve the efficiency, consistency and speed

of flowing products to our stores.

• We implemented hundreds of new technology appli-

cations and installed thousands of pieces of hardware

throughout our organization to make our guests’

experience more rewarding and to make our team

members’ work environment more productive and

more fun.

• We invested hundreds of millions of dollars in the

growth of the Target Visa portfolio, delivering more

value to our guests and producing a substantial

increase in revenues and receivables balances that

accounted for more than 100 percent of our overall

credit card operation’s annual growth.

• And we remained steadfast in our commitment to

support programs that improve the quality of life in

the communities where we operate, to embrace the

diversity of our guests and team members and to

perpetuate our heritage of strong corporate gover-

nance and integrity.

As we move into 2004 and beyond, we continue to

challenge ourselves to seize new opportunities to delight

our guests—to offer more fashion and differentiation,

“In addition, we are optimisticabout the potential future bene-fits provided by other programswe are pursuing, such as ourglobal sourcing and guestrelationship management efforts.Many of these initiatives increas-ingly reflect the integration of cross-functional disciplines,allowing us to leverage ourresources, improve our efficiencyand increase our overall agilityand speed.”

“As we move into 2004 andbeyond, we continue to challengeourselves to seize new oppor-tunities to delight our guests—to offer more fashion anddifferentiation, greater value,reliability and convenience,quicker delivery of new productand faster, friendlier service—in short, to do what we havealways done, but better.”

3

greater value, reliability and convenience, quicker

delivery of new product and faster, friendlier service

—in short, to do what we have always done, but better.

As described in the following pages of this report,

our plans in 2004 include the continued profitable

expansion of the Target store base in line with our

historical growth in the range of 8 to 10 percent net new

square footage annually. We expect to add approxi-

mately 95 to 100 total new stores, or about 80 to 85

new stores net of closings and relocations. We are very

excited about the modifications we are introducing in

our new store design in 2004 because we believe this

current iteration of Target store is more pleasant and

inviting and promotes our goal of being the preferred

In the past ten years, Target has approximately doubled

its number of stores, roughly tripled its revenues, and

more than quadrupled its pretax segment profit and

Target Corporation has delivered nearly an 18 percent

increase in average annual earnings per share and a total

annualized return to shareholders of about 23 percent.

As we look to the future, we are confident in the

underlying strategy, growth and profit potential of

Target Stores. Based on our proven track record of

performance, we believe that Target will continue to

deliver a brand experience that is preferred by our

guests, and as a result, we believe that Target still has

significant opportunities for profitable expansion and

market share increases in the continental United States.

shopping destination for our guests. In addition, we are

optimistic about the potential future benefits provided

by other programs we are pursuing, such as our global

sourcing and guest relationship management efforts.

Many of these initiatives increasingly reflect the inte-

gration of cross-functional disciplines, allowing us to

leverage our resources, improve our efficiency and

increase our overall agility and speed—critical factors

in sustaining our competitive advantage in a dynamic

retail environment with a competitor as formidable

as Wal*Mart.

One of the reasons for the success of Target over

the long term in this competitive arena is the continuity

and consistency of our strategy. For more than four

decades, we have been able to replicate the unique

Target formula across the country by remaining

focused on who our guest is and what she wants,

and by consistently creating the excitement that our

guests value. We have demonstrated our ability to

execute, to innovate and to grow profitably over time.

Though our outlook for Mervyn’s and Marshall Field’s

is less certain at this time, we firmly believe that the

strategic review we are undertaking and our resulting

decision and actions serve the long-term interests of

Target Corporation overall and re-affirm our primary

objective to create substantial value for our shareholders.

Sincerely,

Bob Ulrich, Chairman and Chief Executive Officer

“As we look to the future, we are confident in theunderlying strategy, growth and profit potentialof Target Stores. Based on our proven track recordof performance, we believe that Target will continueto deliver a brand experience that is preferred by our guests.”

4

ocus on Frequency Research shows that

guests time their shopping trips to coincide

with the replenishment of specific consumable

and commodity items, such as household

cleaners, paper supplies, prescriptions, food

and beverages, and health and beauty aids. For more

than a decade, sales of these categories at Target have

substantially outpaced the rest of the store. To satisfy our

guests’ demand for greater value and convenience and

to gain a greater share of their overall spending, we are

elevating our focus on strategies to drive higher frequency.

For example, we are:

• expanding our merchandise selection of

consumable items,

• increasing the visibility of everyday essentials through

more prominent marketing and in-store presentation,

• investing in pharmacy technology and guest communi-

cation to improve speed and service and strengthen

our relationship with our pharmacy guests,

• merchandising and marketing to specific guest

segments, such as Mom and Baby and households

that are moving or relocating, and

• ensuring that our prices remain competitive

and compelling.

Exclusive Design PartnershipsTarget is committed tooffering fashion newness andexcitement to our guestseach time they visit our storesand our exclusive designpartnerships contributemeaningfully to this differen-tiated merchandise strategy.For example, in 2003, wecontinued to expand ourcollaborations with currentdesigners like Sonia Kashukand Michael Graves andintroduced new lines fromIsaac Mizrahi, Liz Lange andAmy Coe. We believe theseexclusive design partnershipsreinforce our brand, delightour guests and help us sustainour competitive advantage.

F

Merchandising

Target has consistently delivered the merchandise our guests want—specifically, a selection of exceptionally priced, differentiatedproduct that no other retailer can match. More recently, we’veconcentrated increased efforts on what our guests need. It’s thisunique combination—appropriately balanced within our assortment—that reinforces our “Expect More. Pay Less.” brand promise andallows us to remain relevant to our guests.

5

The Right Brands, Right NowOf course, satisfying our guests’ needs is only part of the

equation. To retain our reputation as a cool place to shop,

we consistently deliver differentiated merchandising, too.

Our competitive advantage lies in our ability to surprise

and delight our guests on every visit—offering them the

opportunity to fill their baskets with what they want while

allowing them to buy what they need.

Design partnerships clearly set Target apart from other

discount retailers. Our guests know and want products

by Isaac Mizrahi, Liz Lange, Sonia Kashuk, Michael Graves,

and Mossimo. Names such as these add excitement to

our assortment and enhance the Target image with our

guests, while our sourcing expertise, scale and brand

strength give these renowned names broad distribution

at uniquely affordable prices.

We also delight our guests by offering trusted national

brands that include Genuine Kids by OshKosh, Virgin Pulse,

Bialetti, Waverly and Woolrich. These brands provide the

reliability and quality our guests demand and their

exclusivity at Target reinforces our unique positioning in

the discount channel.

Among discount retailers, Target is unquestionably the

leader in trend merchandising and innovation. In fact,

in 2003, Target became the first general merchandise

retailer to receive an award from the Smithsonian

Institution’s Cooper-Hewitt National Design Museum for

helping advance the relationship between design and the

quality of life. The talent and experience of our in-house

product design and development team, in combination

with the extensive resources of Associated Merchandising

Corp. (AMC), our global sourcing organization, enable

Target to offer owned brands, such as Merona, Xhilaration

and Room Essentials, that represent current-season

fashion and themes at considerable savings to similar

specialty-store items. By leveraging technology and

working directly with manufacturers around the globe,

AMC ensures that our goods are produced in accordance

with our high-quality, low-cost standards and meet our

speed-to-market objectives. As other companies work

to create their own sourcing organizations, we continue to

enhance Target’s sourcing power, speed new products

to our guests and maintain competitive prices.

Guest DemographicsOur commitment to pleasingour guests is inherent in our strategy: it drives ourmerchandising as well asmany of our investment andoperating decisions. As aresult, we strongly believe thatwe need to know our guestand understand her prefer-ences. Though we recognizeand respect the individualityof each guest, our researchsuggests that more than90 percent of our guests arefemale with a median age of 45 years. Approximatelyone-half have earned a collegedegree and about 40 percenthave school-age children at home. By continuing tosupplement this guest profile,we are better able to satisfyeach guest’s wants and needs.

Trusted National Brands As a complement to our owned brands and exclusive design partnerships,we also offer our guests the quality and trend of such trusted national brands as Waverly, Calphalon,Virgin Pulse and Sony Liv.

6

Buying TimeGuests shop with retailers who offer them what they

want. And in many cases, what guests want is more time.

As a result, we are keenly focused on producing an

in-store shopping experience that is fast and convenient.

In addition, Target and Marshall Field’s have created

Web sites that allow our guests to shop quickly and

easily from the comfort of their own homes. In 2003,

we expanded our online functionality to allow guests to

link their Club Wedd and Marshall Field’s Gift Registries

and to purchase from the world’s largest online gift assort-

ment in a single transaction. This multi-channel approach

to sales and marketing, and smart use of technology,

satisfies a critical guest demand and generates profitable

market share growth.

A Consistent CommitmentDelivering the right balance of differentiation and value

is the cornerstone of our strategy and is inherent in our

Expect More. Pay Less. brand promise. Today, we believe

that we’re right on Target—but we also know we’re far

from finished. Our commitment to delight our guests

with exciting fashions, exceptional convenience and

selection, and superior value means that we will continue

to embrace new trends and pursue new opportunities to

sustain our competitive advantage.

Mom and Baby Target is an importantdestination for expectant and newmothers. To increase their ease of shopping, we are now groupingtogether their high-demand itemslike diapers, formula, infant andtoddler apparel and baby furnitureand accessories.

Movers Target offers guests who arerelocating or moving a broad array ofcore household basics, home fashionsand decorative items to make theirtransition to their new home asmooth and pleasant experience.

Wants & Needs Guided by our Expect More. Pay Less. brandpromise, we are unwavering in our commitment to create valuefor our guests. We fully recognize that our guests satisfy theirwants through our offering of trend-right merchandise, exclusivebrands and design partnerships…and, that our guests satisfy theirneeds with our reliable selection of consumables and commodities,exceptional prices and fast, convenient service. By maintaining an appropriate balance in this equation, Target is able to furtherstrengthen guest loyalty, drive increased frequency and deliversuperior financial performance.

Consumables We’re expanding ourselection of consumables with moremeal and baking essentials, snacks,beverages and convenience itemssuch as milk and orange juice—making Target an even better one-stop-shop for busy guests.

Pharmacy By offering knowledge-able, friendly assistance and conven-ience, Target pharmacies createadded value for our guests. We arecommitted to deepening this guestrelationship through improvedcommunication and faster service.

Frequency Initiatives We haveintensified our focus on items andcategories that drive more frequentshopping trips and that appeal tospecific guest segments, such asthose experiencing major transitionsin their lives.

Commodities Reflecting our guests’preferences, we have expanded ourassortment of everyday essentials,raised the visibility of these items in our stores and in our marketing,and established pricing that is bothcompelling and competitive.

7

Store Experience and Growth

Fast, friendly service. Clean, fun-to-shop stores. Knowledgeable team members and the merchandise our guests want and need most. They’re all components of a Target store experience that no otherretailer can match.

ast, Fun and Friendly Feedback from our

guests plays an important role in our efforts to

deliver a consistent, convenient and enjoyable

Target shopping experience. It has led us to

place significant importance on factors such as

speed, store cleanliness and excitement, and merchandise

quality, trend and presentation.

In 2003, we continued to invest in technology and

service initiatives that enhance our guests’ satisfaction

during each of their visits to a Target store—many with

an emphasis on improving speed.

• We added nearly 10,000 new price scanners that allow

Target team members to quickly verify product avail-

ability, to facilitate merchandise price checks and to

locate items anywhere within our stores.

• When guests in our stores have questions, they don’t

have time to wait. To make it easier and more con-

venient for them to get the help they need, we’ve

installed more red service phones throughout Target

stores and adopted measures to improve our response

time to guest calls.

• Speed at checkout continues to be a top priority, and

during 2003, we further reduced our guests’ length of

wait to pay. Specifically, we reiterated our objective to

allow no more than two guests in a checkout line at

any given time; we increased our investment in cashier

training; and we implemented systems that seamlessly

give our team members the capability to open addi-

tional check lanes when needed.

• Even our ability to process merchandise returns has

been simplified and expedited, making our guests’

hectic lives much easier. With our receipt-lookup

system, we are able to process a merchandise return

within 90 days of its purchase, even without the original

receipt, if the purchase was made using a check or

credit card.

F

2004 Prototype To provide a shopping experience that our guests prefer, we continue to evolve our store design,merchandise assortment,signing and presentation. In our newest iteration, wehave realigned merchandiseadjacencies to create morepowerful category presenta-tions and we have expandedor edited our assortments to better reflect our guests’shopping patterns. On theexterior, our design andmaterials complement thelocal architecture and naturallandscape and integrateimprovements in accessibility,safety and lighting.

8

SEE.SPOT.SAVE.

While our guests appreciate our fast service, they also

value the fun and friendly Target shopping experience—our

knowledgeable, responsive team members, our pleasant,

inviting stores and the energy, excitement and enter-

tainment produced by our merchandising and marketing

efforts. Fast, Fun and Friendly is how we strive to serve

our guests at Target everyday; it’s also how we live the

Target brand.

Looking GoodThe appearance and atmosphere within Target stores

are as integral to the Target brand as our differentiated

merchandising, our distinctive marketing and our fast, fun

and friendly guest service. We are uncompromising in our

standards of housekeeping, unwavering in our commit-

ment to maintain superior in-stock levels and attractive

merchandise presentations, and we annually invest about

$400 million to remodel, expand and update our existing

stores. In 2003, our guest research indicated that focusing

on these details is paying off with our guests, as our guest

survey scores for these attributes were among the highest

in our history.

In 2004, we will unveil the newest Target prototype,

which more effectively conveys category dominance and

value, provides more guest-friendly merchandise adja-

cencies, and offers assortments in key categories that have

been expanded or edited to reflect our guests’ preferences.

In our new Consumables World, additional space is devoted

to high-frequency goods such as pets, paper products,

health and beauty aids and food. Entertainment World

brings electronics, entertainment, toys and sporting

goods together in one fun destination for families and

kids of all ages. And Target Baby, our Mom and Baby

World combines essentials like diapers and formula with

apparel, infant and toddler accessories and furniture.

Our guests have come to expect great looking Target

stores, and we intend to consistently deliver.

SuperTarget SuperTarget complements the tremendous growthprovided by our traditional discount stores and promotes our brandexperience in each store. Like Target, SuperTarget offers a unique,differentiated general merchandise offering, yet also provides ourguests the added convenience of a high-quality, full-line groceryassortment. Both stores are focused on delivering fashion and value.Given the acceptance of this concept by our guests and its financialcontribution to Target, we expect SuperTarget to continue to bean important element of our growth for many years to come.

Speed Because we under-stand the importance of timein our guests’ hectic lives, we deliberately invest millionsof dollars in systems, teammember training and elementsof store design that offer ourguests greater speed andconvenience when they shopin our stores.

Value Our commitment toour Expect More. Pay Less.strategy remains as strong as ever. The strength of ourbrand reflects our keen focuson delighting our guests bysuccessfully balancing ouroffering of fashion newnessand differentiation withoutstanding value.

9

Speeding into 2004…Momentum Backed by SuccessThrough disciplined investment in new discount stores and

SuperTarget stores, and the growth of sales in existing

stores, Target is enjoying profitable market share increases.

We continue to add eight to 10 percent, net, to our retail

square footage annually, with SuperTarget stores typically

representing about one third of this growth.

At SuperTarget, guests find the great merchandise

they’ve always found at Target, plus a well-stocked super-

market. These stores are producing strong results and we

continue to refine our merchandising and operations to

ensure greater guest satisfaction. We remain focused on

improving our sourcing, offering unique products and

delivering exceptional value. We are adopting new higher

standards for freshness, food safety and sanitation. We

have significantly improved the packaging design on our

own Archer Farms and Market Pantry products, and we

are more than doubling our penetration of these brands

in our stores.

To achieve our objective to be the preferred shopping

destination for our guests, we are relentlessly pursuing

new opportunities and initiatives that enhance our brand

identity, while maintaining a disciplined capital investment

program. We understand that our guests appreciate the

chain-wide consistency of Target—our dedication to fast

and friendly service as well as clean, fresh, easy-to-shop

store environments. Together, these elements have been

important contributors to our past success and we believe

they will be key components in the future as well.

Owned Brands Our owned brands, such as Market Pantry, Archer Farms, Merona and Xhilaration, form the foundation of ourdifferentiated strategy in both our food and general merchandiseassortments. Because our grocery brands are under-penetratedand represent a high-quality, value-priced alternative for our guests,we are working diligently to expand our offering. In 2003, ourmerchandise introductions produced a 60 percent increase in items.

Fast, Fun and Friendly Team Our commitment to please our guestsis at the heart of our strategy and inherent in our brand identity.Each of our approximately 273,000 team members is committedto offering outstanding service to our guests, every day, in everystore, one guest at a time. By injecting speed into each guestexperience, providing knowledgeable and cheerful service andensuring that our stores are clean and inviting, we make superiorguest service a priority.

“Steer a red-plastic shoppingcart down the wide white aislesof any Target store and you’llsee wonderful design mixed inwith the jumbo-size laundrydetergent, school supplies andpet food…” — House Beautiful, June 2003

10

At Target Financial Services, we are driven by dual objectives: (1) to build retail sales by deepening our relationships with our guests,and (2) to sustain outstanding profitability and growth in deliveringfinancial services to our guests.

o achieve these joint objectives, we’re offering

our guests more reasons to shop our stores

— like loyalty programs that speak to what

matters most in their lives and financial

product innovations that make shopping

and saving easier than ever before. We strive to fully

integrate our efforts into a unified guest experience, while

operating with the discipline, expertise and strategy of a

stand-alone financial services business.

Adhering to Core PrinciplesSince our credit card operations were consolidated in 1995,

our business decisions and growth have been guided by

four core operating principles.

The first principle is that we drive our growth through

value-added programs, not through aggressive credit

decisions. Our various Rewards programs, for example,

give guests compelling reasons to use our cards, rather

than other general purpose credit or debit cards.

Our second principle is that we exercise strong financial

controls in the management of our business. We never

compromise our underwriting standards for short-term

gain or growth. This discipline ensures that we are able

to sustain our profitability as we grow our portfolio over

the long-term.

Our third principle is to make strategic investments,

particularly in state-of-the-art technology that will

contribute to increased efficiency and performance.

Investments in recent years have enabled us to mean-

ingfully reduce our operating expense rates and achieve

levels of guest service that are among the best in the

credit card industry.

Our fourth and final guiding principle is our commit-

ment to building a superior organization by attracting

and retaining talented and dedicated team members.

The majority of our financial services management has

significant prior experience at other leading financial

institutions.

More Great Reasons to Shop at TargetSimilar to our focus in other areas of the company, our

financial products and services are designed to profitably

increase shopping frequency and average transaction

amount, while reinforcing and enhancing our brand identity.

Financial Services

Target Visa During 2003, weenjoyed continued success inthe growth and performanceof the Target Visa card,reflecting our guests’ strongpositive bond with our brand.As of year-end, the TargetVisa portfolio included morethan four billion dollars inaccounts receivable and overnine million cards issued andrepresented a substantialportion of the annual increasein our credit card operation’sprofit contribution.

T

11

While our proprietary credit cards at Target, Mervyn’s

and Marshall Field’s create an important affinity with our

guests and contribute meaningfully to our financial

performance, other products and services are increasingly

visible and valuable. Gift cards, for example, represent

another form of branded payment that has experienced

rapid growth in recent years. Since our first GiftCard was

issued in 1999, GiftCards have enjoyed a substantial double-

digit dollar increase every year. And, by applying the same

differentiated and innovative approach to our GiftCards

as to our merchandising and marketing, Target is among

the largest issuers of gift cards in the world.

Target VisaThe Target Visa exemplifies both our key strategic objec-

tives and our core operating principles.

Target Visa guests are more devoted Target shoppers

and routinely spend 50 to 60 percent more at Target

stores than other Target guests. This loyalty affirms our

belief that the utility of the Target Visa card, in conjunction

with programs such as Take Charge of Education (TCOE)

and Target Rewards, delivers meaningful, incremental

value and strengthens our bond with our guests.

This bond is reinforced through the efforts of our own

credit card team members. By maintaining direct access

to our guests, we are able to acquire valuable information

that helps us to more effectively serve their needs.

Furthermore, our considerable experience in managing

credit card operations over many decades has contributed

to an operating efficiency consistent with industry leaders.

From a financial perspective, Target Visa demonstrates

our adherence to financial discipline and also clearly

satisfies our primary objectives. Since the card was first

introduced, our net yield on the Visa portfolio has steadily

improved, and in 2003 our profit contribution from this

portfolio was substantially above its prior year level.

Growing Fast, Growing SmartOur credit card operations have achieved tremendous

results. Yet, for all of our success, we’re not standing still.

We continue to pursue initiatives that expand our horizon

beyond the traditional credit card business and leverage

our scale and technology to generate profitable growth

and improve our guests’ experience. For example, our

guest contact centers are staffed by specialists who handle

all guest inquiries and correspondence from Target stores

guest relations, our bridal and baby registries, Take Charge

of Education and our credit card operations. In addition,

by recognizing the parallels between credit and check

payment models and applying our core credit card

disciplines and tools to our in-store check authorizations,

we have significantly reduced our returned check expenses.

Vision and discipline continue to be the cornerstones

of our approach as we propel our business forward. And

as we grow, we remain firmly committed to our mission:

to deliver financial products and services that drive sales,

deepen guest relationships and sustain outstanding

profitability.

Store-Brand Credit CardsOur store-brand credit cardsbuild guest loyalty andreinforce affinity with ourbrand through uniqueRewards programs, specialoffers and customizedmarketing. They also generatea strong financial return.

GiftCards Through innovative designs that reinforce our brand image and satisfy a wide range of gift-givingoccasions, GiftCards are an important way for us todelight our guests and drive incremental sales and traffic in our stores. According to a recent survey, more than90 percent of guests who come to a Target store toredeem a GiftCard spend more than the value of the card.

GIFTCARD

12

Supply Chain and Technology

Positioned among the best in retail, our supply chain helps drivesales, reduce costs and ensure the availability of products our guestsmost want and need. Through continued investment in technology,infrastructure and operational improvements, we are pursuinginitiatives that we believe will increase both our guests’ satisfactionand our profitability. In order to sustain this competitive advantage,we have put our supply chain on the fast track.

evelop. Deliver. Delight. Being first with

new trends or products is one of the ways

we delight our guests. And, shortening our

merchandise lead times is one of the ways

we maintain our fashion leadership position.

To speed delivery of product to our stores’ shelves, we

are using sophisticated online tools to design product

and to negotiate pricing, production and delivery terms.

Additionally, we are leveraging the global expertise of

AMC to identify reliable vendor partners, source materials

and manufacture the high-quality, fashionable merchandise

our guests expect. Our efforts in recent years have pro-

duced a significant reduction in the length of our supply

chain and we remain committed to achieving further

improvements moving forward.

Strengthening our NetworkTo support our new store growth and better serve our

existing stores, we continue to expand our distribution

capacity and invest in leading-edge technologies. Our

current distribution network includes 19 regional distri-

bution centers (RDCs) and three import warehouses, with

more than 90 percent of our general merchandise flowing

through our RDCs. In addition, we are steadily expanding

our self-distribution of dry grocery products, with nearly

50 percent of these items handled in-house in 2003.

The recent integration of import warehouses into our

supply chain adds an important dimension to our strategy.

These facilities store seasonal and imported merchandise

and allow us to funnel goods through our regional distri-

bution centers to our stores as demand warrants. By

providing incremental distribution capacity, these facilities

also increase the effectiveness of our item segmentation

strategy, allowing us to move high-demand items through

our distribution process with greater priority.

Technological enhancements in our RDCs continue to

improve the productivity, accuracy and speed within our

supply chain.

• In 2003, we began implementation of an electronic

labeling system called Automated Receiving Technology

(ART). This program utilizes real-time information

In-Stock Levels Being in-stock on the items our guests want is a key factor in delivering consistent guest satisfaction andgenerating strong incremental sales and profits. To achieve theseresults, we are focused on initiatives that optimize inventory flowand balance in-stock reliability with inventory control. We havemade tremendous strides toward achieving our goals and believewe are well-positioned for the future.

D

13

about where product is needed and automatically

labels cartons appropriately, accelerating the flow of

goods directly to our stores and eliminating what was

once a time-consuming, labor-intensive procedure.

ART is planned for rollout across our distribution

network in 2004.

• We’re also implementing a system for imported prod-

ucts that incorporates more timely sales and inventory

information into the merchandise allocation decision

and helps us allocate imported product to our stores

closer to the time of need.

• Another recently-launched system that is benefiting

both our store team members and our guests identifies

the specific aisle and shelf location for incoming mer-

chandise and improves our store discipline and our

stores’ speed of stocking new product.

• And finally, our Web-enabled supply chain tracking

system provides end-to-end visibility for merchandise

orders—from vendor booking to in-store receipt, facili-

tating faster action when there’s a break in the chain.

Rapid. Ready. Reliable.Maintaining superior in-stock levels remains a top priority,

and our focus on this metric has resulted in two consecutive

years of record in-stock levels. The key contributors are:

• a keen focus on the in-stock positions of our 2,500

most-wanted items,

• improved in-stock levels for items advertised in our

weekly circulars,

• increased efficiencies in transitioning product from one

season to the next, and

• intensified efforts to deliver more reliability and fresh-

ness through improved in-stock performance of food

and consumables.

Making High-Speed ConnectionsEach year, the speed at which technology changes

seems to grow exponentially. At Target, we’re pursuing

new applications — evaluating emerging opportunities

and testing recent developments that may better serve

our guests.

Next on the horizon? We are intently focused on

increasing our level of directly-imported product—from

its year-end 2003 level representing about 15 percent of

our purchases to approximately double this amount over

the next few years. And though still early, Target is also

actively exploring Radio Frequency Identification (RFID)

and its potential benefits.

Through our commitment to technological and

operational advances, Target will continue to find ways

to delight our guests, retain our supply chain leadership

and build on our foundation of creating substantial

shareholder value.

Global Sourcing AMC is one of the world’s largest sourcingorganizations, with approximately 2,000 team members in over50 countries. The AMC team contributes meaningfully to the qualityand efficiency of our sourcing activities and will play a larger rolemoving forward as we shift a significant portion of our indirectimports to direct purchases over the next three to five years.

Efficient Logistics Our supply chain continues to be an area ofmajor emphasis and substantial strategic investment. We are intentlyfocused on initiatives that increase productivity, improve in-stockreliability and accelerate the speed of merchandise availability in ourstores. Through continuous innovation, investment in technologyand infrastructure and increased collaboration with our vendors,we are working to further strengthen our competitive position.

SUPPLY CHAIN GROWTH 1998–2003

target.com

+44%STORES SERVICED

+82%C A RTO N S P R O C E SS E D

+110%RDC SQUARE FOOTAGE

Regional Distribution Centers (RDC)

Import Warehouses

’99’98 ’00 ’01 ’02 ’03

20

25

15

10

5

14

Corporate Citizenship

What makes a good corporate citizen? At Target, it’s a commitmentto community giving, inclusive environments for our team membersand guests, and a strong and focused approach to governance.Public involvement has been a key component of our corporatestrategy and operations for decades and it remains an inherentelement of our future direction and brand image.

uilding Healthy, Safe Communities Local,

national and international challenges continue

to affect our guests’ lives and, therefore, our

business. Target contributes over two million

dollars a week and thousands of volunteer

hours to programs that strengthen families and build

stronger communities through education, arts, social

services, and other vital community partnerships. And

although we’ve always supported education, we’ve

expanded our commitment in innovative ways.

• Through Take Charge of Education (TCOE), our school

fundraising initiative, we’ve contributed more than

$100 million to create opportunities for teachers,

students and schools.

• Because reading ability is a key component in life-long

learning, we partner with organizations that seek to

improve childhood reading, such as Reach Out & Read,

the U.S. Department of Education and through numer-

ous book festivals across the country. Our own Ready.Sit. Read! program at Target, Go Read! at Marshall

Field’s and Go Places. Read! at Mervyn’s leverage the

power of Target Corporation to connect children across

the nation with books.

• Target Corporation and the Tiger Woods Foundation

are partners in Start Something, a program that helps

participants ages 8 to 17 identify and realize their

dreams. To date, two million children have enrolled.

Target Corporation also remains committed to increasing

access to the arts. For example, we sponsor a Marshall

Field’s Day of Music in Detroit, Minneapolis and Chicago.

In San Francisco, we sponsor Target Tuesdays at the Asian

Art Museum. And, families in Southern California enjoy

musical productions as part of ‘Mervyn’s Musical Mornings.’

In 2003, Target extended its giving overseas with the

AMC International Grant Program, which funds accessible,

quality educational opportunities for children in 20 countries

where AMC has offices. Because they are administered

at the local level, these grants help communities help

themselves, building leadership and momentum for

future successes.

During the year, Target also helped address critical

safety issues in our store communities. For example, in

Minnesota, Target partnered with the State of Minnesota

to create CriMNet, an integrated database that links more

B

Corporate Governance“We have long believed that a strong board makes a first-class management evenstronger, that a professionalboard makes managementeven more professional, thatan optimum relationshipbetween board and manage-ment creates an almostunbelievable dynamic, andthat the ideal board setup is the corporation’s bestprotection of its future…It is for this reason that wehave given a tremendousamount of time and thoughtto matters of corporategovernance—to its philosophyand structure.” — Kenneth N. Dayton, January 1984

15

®

than 1,100 criminal justice jurisdictions throughout the state

in an effort to reduce the growing problem of recidivism.

This partnership demonstrates our commitment to make

every store community safer.

Target House is a home-away-from-home for families

of children undergoing treatment at St. Jude Children’s

Research Hospital. This unique residence that Target

and its vendors helped to build and furnish virtually

guarantees housing to every family with a sick child. The

hospital’s medical staff, which provides its services free

of charge to children from anywhere in the world, has

attributed this distinctive environment to improved cure

rates among its patients.

The strength of many. The Power of One.At Target, we define diversity as individuality—the unique

attributes, perspectives and talents that strengthen our

company as a whole. Promoting diversity within our work

and store environments is an important and growing part

of our culture. In 2003, we launched The strength of many.The Power of One. campaign to create excitement and

awareness of the benefits of diversity among our team

members and pledged our continued efforts to make

Target Corporation wholly inclusive.

We support diversity in many ways: by hiring a wide

range of team members who reflect the communities we

serve, by welcoming all guests into our stores and making

them feel valued and comfortable, by sponsoring inno-

vative events across the nation, and by embracing a

multicultural merchandising strategy that meets the needs

of a diverse marketplace. We also create opportunities

for vendors through our Minority and Women Business

Development program. Each year, Target enlists the services

of more than 2,800 such businesses to fill a variety of

needs, from general construction to technology services.

Fulfilling our Legacy of Leadership in GovernanceA commitment to strong corporate governance has been

an integral part of our corporate identity for decades

and is a powerful legacy of our Dayton family founders.

Consistent with this heritage, we maintain a high-quality,

independent board of directors, whose members represent

a balance of industry experience, geography, ethnicity and

gender. Our board actively challenges senior management

to fulfill its obligations and realize new opportunities.

And, to ensure that we perpetuate this strong and vital

corporate governance model, we formally review our

practices and policies each year.

We firmly believe that strong corporate citizenship is a

key to our continued success. Our proactive and visionary

approach to board leadership, our heartfelt community

involvement and our commitment to diversity combine

to reinforce our positioning for the years ahead.

The strength of many. The Power of One. We respect and valuethe individuality of all our team members and guests. We embracediversity as a means to harness our many individual strengths so that we can work together as one team with one vision. Webelieve this inclusive culture helps to ensure our future success.

Our team members proudlyshare and support our giving philosophy by lending their time, talent and financial resourcesto local charities. During 2003,our team members contributedmore than 350,000 hours to thousands of projects nationwide.

By designating the school of their choice and using theirTarget Guest Card or TargetVisa card, our guests havedirected Target to donate morethan $100 million to schoolsthroughout the country.

Target House exemplifies ourheartfelt commitment. Alongwith our celebrity partners andmore than 150 vendors, TargetCorporation has given morethan $27 million to this effort inthe past seven years.

Community GivingOur consistent dedication overtime to community giving setsTarget Corporation apart fromother companies. Through oursupport of local and nationalprograms, we are able toimprove the quality of life inthe communities we serve.

16

Target Market Share

10% + Market ShareArizona 36 4,200California 184 22,486Colorado 29 3,834Illinois 62 7,706Iowa 19 2,535Maryland 24 2,968Minnesota 65 8,590Nebraska 11 1,397New Jersey 28 3,537North Dakota 4 505GroupTotal 462 57,758

7.5% – 9.9% Market ShareFlorida 78 9,736Georgia 38 4,873Kansas 14 1,810Massachusetts 19 2,391Michigan 51 5,718Montana 7 764Nevada 14 1,736Texas 107 14,019Utah 9 1,428Virginia 31 3,865Washington 29 3,305Wisconsin 29 3,358GroupTotal 426 53,003

5.0% – 7.4% Market ShareDelaware 2 268Indiana 32 3,885Missouri 26 3,349

New Hampshire 5 649New Mexico 8 872New York 37 4,869North Carolina 31 3,734Ohio 44 5,258Oregon 16 1,892Pennsylvania 30 3,831Rhode Island 2 254South Carolina 14 1,726South Dakota 4 417Tennessee 22 2,594GroupTotal 273 33,598

2.5% – 4.9% Market ShareAlabama 10 1,540Connecticut 6 773Idaho 5 536Kentucky 12 1,360Louisiana 10 1,428Maine 1 125Oklahoma 10 1,273Wyoming 2 187GroupTotal 56 7,222

0.0% – 2.4% Market ShareArkansas 3 368Mississippi 2 239Vermont 0 –West Virginia 3 375GroupTotal 8 982

Total 1,225 152,563

Year-end 2003 Store Count and Square Footage by State

For purposes of this map, market share is defined as Target Stores sales by state as a percentage of U.S. General Merchandise Store sales, including departmentstores, discount stores, supercenters and warehouse clubs. For other purposes, broader or narrower measures of market share may be more appropriate.

No. of Retail Sq. Ft.Market Share Group Stores (in thousands)

No. of Retail Sq. Ft.Market Share Group Stores (in thousands)

17

Analysis of Operations

Target Corporation operates large-format general merchandise

stores in the United States, including discount stores, moderate-

priced promotional stores and traditional department stores, and

additionally operates a small, rapidly growing on-line business. We

drive incremental merchandise sales and profitability through

increases in our comparable-store sales and through contribution

of new store growth at Target. Additionally, we benefit from our

credit card operations which strategically support each of our retail

segments. We focus on delighting our guests by offering both

everyday essentials and fashionable, differentiated merchandise at

exceptional prices. Our ability to deliver a shopping experience that

is preferred by our guests is supported by our strong supply chain

and technology network, a devotion to innovation which is ingrained

in our organization and culture and our disciplined approach to

managing our current business and investing in future growth.

Though our industry is highly competitive and subject to macro-

economic conditions, we believe we are well-positioned to deliver

continued profitable market share growth for many years to come.

On March 10, 2004, we began reviewing strategic alternatives

for Mervyn’s and Marshall Field’s that include but are not limited

to, the possible sale of one or both of these segments as ongoing

businesses to existing retailers or other qualified buyers. The follow-

ing Management’s Discussion and Analysis, Consolidated Financial

Statements, and Notes to Consolidated Financial Statements do

not reflect any impact of any strategic alternatives as we are in

the early stages of this review process.

Management’s Discussion and Analysis is based on our

Consolidated Financial Statements as shown on pages 26-29.

Revenues and

Comparable-store Sales

Total revenues include retail sales and

net credit card revenues. Net credit

card revenues represent income

derived from finance charges, late

fees and other revenues from use of

our Target Visa and proprietary credit

cards. Comparable-store sales are

sales from stores open longer than

one year. Stores that were remodeled

at their existing location and did not

convert to a SuperTarget remain in

the comparable-store sales calculation.

Stores that have been converted to

a SuperTarget or moved to a new

location are included in the comparable-store sales calculation

once they are open longer than one year.

In 2003, total revenues increased 9.7 percent and comparable-

store sales increased 2.9 percent. Retail price deflation had a negative

impact of approximately 3 percent on sales growth. At Target,

which accounted for 86 percent of our total revenues, slightly

more than half of our 12 percent increase in revenues was driven

by new store expansion, while the rest of the increase resulted

from a 4.4 percent increase in comparable-store sales and an

increase in net credit card revenues. Mervyn’s and Marshall Field’s,

which accounted for 7 percent and 5 percent of our total revenues,

respectively, experienced a decline in revenues, primarily due to

decreases in comparable-store sales.

In 2002, total revenues increased 10.3 percent and comparable-

store sales increased 1.1 percent. Retail price deflation had a negative

impact of approximately 3 percent on sales growth. At Target,

which accounted for 84 percent of our total revenues, the increase

was driven by new store expansion, an increase in net credit card

revenues and a 2.2 percent increase in comparable-store sales.

Mervyn’s and Marshall Field’s, which accounted for 9 percent and

6 percent of our total revenues, respectively, experienced a decline

in revenues primarily due to decreases in comparable-store sales.

Revenues and Comparable-store Sales Growth

2003 2002 2001

Comparable- Comparable- Comparable-store store store

Revenues Sales Revenues Sales Revenues Sales

Target 12.0% 4.4% 13.3% 2.2% 13.1% 4.1%

Mervyn’s (6.9) (7.6) (5.2) (5.3) (1.7) (1.5)

Marshall Field’s (4.0) (2.6) (3.1) (3.7) (5.2) (5.7)

Total 9.7% 2.9% 10.3% 1.1% 9.7% 2.7%

Revenues per Square Foot*

2003 2002 2001

Target $282 $278 $274

Mervyn’s 165 178 187

Marshall Field’s 178 180 186

*Thirteen-month average retail square feet.

In 2004, we expect revenues to increase due to new store

growth and an increase in comparable-store sales and net credit

card revenues.

Gross Margin Rate

Gross margin rate represents gross margin (sales less cost of sales)

as a percent of sales. Cost of sales primarily includes purchases,

markdowns and other costs associated with our merchandise. These

costs are partially offset by various forms of consideration earned

or received from our vendors, which we refer to as “vendor income.”

’99 ’00 ’01 ’02 ’03

$33,6

57

$36,8

51

$39,8

26

$43,9

17

$48,1

63

45,000

37,500

30,000

22,500

15,000

7,500

Total Revenues

(millions)

MANAGEMENT’S DISCUSSION AND ANALYSIS

18

In 2003, our consolidated gross margin rate increased

0.5 percent to a rate of 32.0 percent primarily due to the adoption

of Emerging Issues Task Force (EITF) Issue No. 02-16 “Accounting

by a Customer (Including a Reseller) for Certain Consideration

Received from a Vendor.” The adoption resulted in a reclassification

of a portion of our vendor income from selling, general and

administrative expenses to cost of sales and had a slight negative

impact on net earnings as described in the Notes to Consolidated

Financial Statements on page 30.

At Target, gross margin rate improved due to the vendor

income reclassification. Mervyn’s gross margin rate improvement

was primarily a result of the vendor income reclassification and

efforts to lower purchase costs through improved negotiating

programs that resulted in markup improvement, partially offset by

an increase in markdowns. Marshall Field’s gross margin rate

increased due to the vendor income reclassification and reductions

in purchase costs which resulted in markup improvement. These

improvements were partially offset by an increase in markdowns.

In 2002, our consolidated gross margin rate expanded by

almost a full percentage point to a rate of 31.5 percent from

30.6 percent. The growth is attributable to rate expansion at Target

and Mervyn’s, primarily due to reductions in purchase costs and

improvements in markup during the year. These increases were

partially offset by additional markdowns at Mervyn’s and Marshall

Field’s and the mix impact of growth at Target, our lowest gross

margin rate division.

Consolidated gross margin rate in 2004 is expected to be

approximately equal to 2003. Gross margin rate at Target is

expected to remain essentially even with that of 2003. We expect

modest gross margin rate expansion at both Mervyn’s and Marshall

Field’s to be offset by the mix impact of faster growth at Target,

our lowest gross margin rate division.

Selling, General and Administrative Expense Rate

Our selling, general and administrative (SG&A) expense rate

represents payroll, benefits, advertising, distribution, buying and

occupancy, start-up and other expenses as a percentage of sales.

SG&A expense excludes depreciation and amortization and expenses

associated with our credit card operations, which are reflected

separately in our Consolidated Results of Operations. In 2003,

approximately $78 million of vendor income was recorded as an

offset to SG&A expenses as it met the specific, incremental and

identifiable criteria of EITF No. 02-16. Approximately $294 million

and $272 million of vendor income was recorded as an offset to

SG&A expenses in 2002 and 2001, respectively. This vendor income

primarily represented advertising reimbursements.

In 2003, our SG&A expense rate increased to 22.9 percent

compared to 22.0 percent in 2002. Over half of this increase is

attributable to the reclassification of vendor income to cost of sales

from SG&A expenses as described in the Notes to Consolidated

Financial Statements on page 30. The remaining increase is

principally due to a lack of sales leverage at both Mervyn’s and

Marshall Field’s.

In 2002, our SG&A expense rate rose to 22.0 percent compared

to 21.6 percent in 2001 because certain items such as medical

expenses increased at a faster pace than sales. This effect was only

partially offset by the mix impact of growth at Target, our lowest

SG&A expense rate division.

In 2004, we expect our SG&A expense rate to increase

slightly from 2003, reflecting our belief that a number of expenses

will increase at a faster pace than sales. These include expenses

related to our defined benefit plans, insurance and stock options,

which we began expensing during 2003 under the prospective

transition method in accordance with Statement of Financial

Accounting Standards (SFAS) No. 148, “Accounting for Stock-

Based Compensation—Transition and Disclosure.” We expect the

effect of these increased expenses to be partially offset by the mix

impact of growth at Target, our lowest SG&A expense rate division.

Depreciation and Amortization

In 2003, depreciation and amortization increased 8.9 percent to

$1,320 million compared to 2002. In 2002, depreciation and

amortization increased 12.4 percent to $1,212 million compared to

2001. The increase in both years is primarily due to new store

growth at Target.

Pre-tax Segment Profit

Pre-tax segment profit is our core measure of profitability for the

three segments and is a required disclosure for segment reporting

under accounting principles generally accepted in the United

States (GAAP).

In 2003, pre-tax segment profit increased 7.9 percent to

$3,734 million, compared with $3,461 million in 2002. The increase

was driven by growth at Target, which produced 93 percent of

consolidated pre-tax segment profit. Mervyn’s and Marshall Field’s

experienced a decrease in pre-tax segment profit compared to 2002.

Pre-tax segment profit increased 16.7 percent in 2002 to

$3,461 million, compared with $2,965 million in 2001. The increase

was driven by growth at Target, which produced 89 percent of

consolidated pre-tax segment profit. Marshall Field’s pre-tax

segment profit in 2002 was essentially equal to 2001, while

Mervyn’s experienced a decline in pre-tax segment profit in 2002

compared to 2001.

A reconciliation of pre-tax segment profit to pre-tax earnings

follows. Our segment disclosures may not be consistent with

disclosures of other companies in the same line of business.

19

Pre-tax Segment Profit and as a Percent of Revenues

Pre-tax Segment Profit As a Percent of Revenues

(millions) 2003 2002 2001 2003 2002 2001

Target $3,467 $3,088 $2,546 8.4% 8.4% 7.8%

Mervyn’s 160 238 286 4.5 6.2 7.1

Marshall Field’s 107 135 133 4.1 5.0 4.8

Total pre-tax segment profit $3,734 $3,461 $2,965 7.9% 8.0% 7.5%

Securitization adjustments:

Loss – – (67)

Interest equivalent – – (27)

LIFO provision credit/(expense) 27 12 (8)

Interest expense (559) (588) (473)

Other (242) (209) (183)

Earnings before taxes $2,960 $2,676 $2,207

In 2001, the $67 million pre-tax loss related to the required adoption of anew accounting standard applicable to securitized accounts receivable. The$27 million interest equivalent represented payments accrued to holders ofsold securitized receivables prior to August 22, 2001 (discussed in detail inthe Notes to Consolidated Financial Statements under Accounts Receivableand Receivable-backed Securities on page 31).

Interest Expense

In 2003, interest expense was $559 million, $29 million lower than

in 2002. The decrease was due to a lower average portfolio interest

rate and a smaller loss on debt called or repurchased, partially

offset by higher average debt outstanding. The average portfolio

interest rate in 2003 was 4.9 percent compared with 5.6 percent

in 2002. The $297 million of debt called or repurchased during

2003 resulted in a loss of $15 million (approximately $.01 per share)

and had an average interest rate of 7.8 percent and an average

remaining life of 20 years.

In 2002, interest expense was $588 million, $88 million higher

than the total of interest expense and interest equivalent in 2001.

The increase was due to higher average debt outstanding and a

greater loss on the early call or repurchase of debt, partially offset

by a lower average portfolio interest rate. The average portfolio

interest rate in 2002 was 5.6 percent compared with 6.4 percent

in 2001. (For analytical purposes, the amounts that represented

payments accrued to holders of sold securitized receivables prior

to August 22, 2001 were considered interest equivalent as discussed

in the Notes to Consolidated Financial Statements on page 31.

After that date, such payments constituted interest expense.) In

2002 and 2001, we incurred losses of $34 million ($.02 per share)

and $9 million (less than $.01 per share) from the early call or

repurchase of $266 million and $144 million of debt, respectively.

The debt called or repurchased had an average interest rate of

8.8 percent and 9.2 percent, respectively, and had an average

remaining life of 19 years and 7 years, respectively.

We adopted SFAS No. 145, “Rescission of FASB Statements

No. 4, 44 and 64, Amendment of FASB Statement No. 13 and

Technical Corrections” in the first quarter of 2002. Under SFAS

No. 145, gains and losses from the early extinguishment of debt are

required to be included in interest expense and are not reflected

as an extraordinary item. Prior year extraordinary items have been

reclassified to reflect this change. The adoption of SFAS No. 145

had no impact on net earnings, cash flows or financial position.

The requirements of SFAS No. 145 are discussed under New

Accounting Pronouncements on page 25.

Excluding the effect of any early call or repurchase of debt,

we expect interest expense in 2004 to remain essentially flat to

2003, as average debt outstanding and the average portfolio

interest rate are not expected to change significantly.

Credit Card Operations

Through our proprietary store-brand credit card programs, some

of which have been available for decades, and our Target Visa credit

card that was introduced nationally in 2001, we offer credit to

qualified guests in each of our business segments. Our credit card

programs strategically support our core retail operations and are

an integral component of each business segment. Our credit card

products support earnings growth by driving sales at our stores

and through improvements in our credit card financial performance.

Our credit card revenues are primarily derived from finance

charges, late fees and other revenues. Intracompany merchant fees

are fees charged to our retail operations on a basis similar to fees

charged by third-party credit card issuers. These fees are eliminated

in consolidation. Third-party merchant fees are paid to us by

merchants that have accepted the Target Visa credit card. In 2003,

our credit card revenues increased to $1,479 million from $1,297

million, or 14 percent, due to continued growth in the Target Visa

credit card portfolio. In 2002, our credit card revenues increased

to $1,297 million from $899 million, or 44 percent, due primarily to

additional revenues earned from the Target Visa credit card portfolio.

’99 ’00 ’01 ’02 ’03

15.4

%

15.4

%

14.7

%

11.0

%

10.9

%

16

8

12

4

Credit Portfolio

Yield

’99 ’00 ’01 ’02 ’03

$4,500

$6,000

$3,000

$1,500

Average Receivables

(millions)

Target Visa Target Guest Card

Mervyn’s Marshall Field’s

20

Credit card expenses include marketing and account service

activities that support our credit card portfolio, as well as bad debt

expense. In 2003, our credit card expense increased to $838 million

from $765 million, or 9.6 percent, primarily due to growth in our

bad debt expense commensurate with the growth in our accounts

receivable. In 2002, our credit card expenses increased to $765

million from $454 million, or 69 percent, due to substantial growth

in our accounts receivable resulting from the Target Visa portfolio.

In 2003, 2002 and 2001, allowance for doubtful accounts as

a percent of year-end receivables was 6.8 percent, 6.7 percent and

6.4 percent, respectively. The increase in 2003 and 2002 was pri-

marily due to higher accounts receivable balances and increases

in the incidence and severity of personal bankruptcies, among

other factors.

We expect our 2004 credit operations to grow at a more

modest rate than the substantial growth we experienced in 2003

and 2002. Our pre-tax credit card contribution as a percent of total

average receivables is expected to continue to be in the range of

10 to 11 percent in 2004.

Credit Card Contribution to Segment Profit

(millions) 2003 2002 2001

Revenues:

Finance charges, late fees and other revenues $1,300 $1,126 $ 779

Merchant fees

Intracompany 97 102 102

Third-party 82 69 18

Total revenues 1,479 1,297 899

Expenses:

Bad debt provision 532 460 230

Operations and marketing 306 305 224

Total expenses 838 765 454

Pre-tax credit card contribution $ 641 $ 532 $ 445

As a percent of total average receivables 10.9% 11.0% 14.7%

Receivables

(millions) 2003 2002 2001

Target

Target Visa $4,190 $3,774 $1,567

Proprietary card 783 827 1,063

Mervyn’s proprietary card 550 626 706

Marshall Field’s proprietary card 672 737 756

Total year-end receivables $6,195 $5,964 $4,092

Past Due

Accounts with three or more payments past due as a percent of total year-end receivables:

Target Visa 3.6% 3.1% 0.5%

Proprietary cards 4.7% 5.1% 4.9%

Total past due 4.0% 3.8% 3.2%

Allowance for Doubtful Accounts

(millions) 2003 2002 2001

Allowance at beginning of year $ 399 $ 261 $ 211

Bad debt provision 532 460 230

Net write-offs (512) (322) (180)

Allowance at end of year $ 419 $ 399 $ 261

As a percent of year-end receivables 6.8% 6.7% 6.4%

Other Credit Card Contribution Information*

(millions) 2003 2002

Total Revenues

Target Visa $ 857 $ 626

Proprietary cards $ 622 $ 671

Total revenues as a percent of average receivables:

Target Visa 21.9% 23.8%

Proprietary cards 31.7% 30.4%

Net Write-offs

Target Visa $ 359 $ 151

Proprietary cards $ 153 $ 171

Net write-offs as a percent of average receivables:

Target Visa 9.2% 5.8%

Proprietary cards 7.8% 7.7%

Average Receivables

Target Visa $3,907 $2,635

Proprietary cards 1,960 2,206

Total average receivables $5,867 $4,841

*The Target Visa credit card does not reflect a full year of activity in 2001and has been excluded due to lack of comparability.

Fourth Quarter Results

Due to the seasonal nature of our business, fourth quarter operating

results typically represent a substantially larger share of total

year revenues and earnings due to the inclusion of the holiday

shopping season.

Fourth quarter 2003 net earnings were $832 million, compared

with $688 million in 2002. Earnings per share were $.91 for the

quarter, compared with $.75 in 2002. Total revenues increased 10.7

percent and 13-week comparable-store sales increased 4.9 percent.

Our pre-tax segment profit increased 17.3 percent to $1,513 million,

primarily driven by growth at Target.

21

Fourth Quarter Pre-tax Segment Profit and Percent Change from Prior Year

(millions) 2003 2002 2001

Target $1,380 18.5% $1,165 8.0% $1,078 20.9%

Mervyn’s 74 (0.3) 75 (42.9) 131 20.8

Marshall Field’s 59 15.6 51 (18.9) 63 (20.2)

Total $1,513 17.3% $1,291 1.4% $1,272 17.9%

LIFO provision 27 12 (8)

Interest expense (130) (154) (135)

Other (72) (36) (68)

Earnings before taxes $1,338 $1,113 $1,061

Critical Accounting Estimates

Our analysis of operations and financial condition are based upon

our consolidated financial statements, which have been prepared in

accordance with GAAP. The preparation of these financial statements

requires us to make estimates and assumptions that affect the

reported amounts of assets and liabilities at the date of the financial

statements, the reported amounts of revenues and expenses during

the reporting period and the related disclosures of contingent assets

and liabilities. In the Notes to Consolidated Financial Statements, we

describe our significant accounting policies used in the preparation

of the consolidated financial statements. We evaluate our estimates

on an ongoing basis. We base our estimates on historical experience

and on various other assumptions that we believe to be reasonable

under the circumstances. Actual results could differ from these

estimates under different assumptions or conditions.

The following items in our consolidated financial statements

require significant estimation or judgment:

Inventory and cost of sales We account for substantially all of our

inventory and the related cost of sales under the retail inventory

method using the LIFO basis. Under the retail inventory method,

inventory is stated at cost, which is determined by applying a cost-

to-retail ratio to each similar merchandise grouping’s ending retail

value. Since this inventory value is adjusted regularly to reflect

market conditions, our inventory methodology reflects the lower

of cost or market. We also reduce inventory for estimated losses

related to shortage, based upon historical losses verified by prior

physical inventory counts. Inventory also includes a LIFO provision

that is calculated based on inventory levels, markup rates and

internally generated retail price indices. Inventory is at risk of

obsolescence if economic conditions change, such as shifting

consumer demand, changing consumer credit markets, or increased

competition, even though substantially all of our inventory sells

in less than six months. Our vendor income and inventory are

described in the Notes to Consolidated Financial Statements on

pages 30 and 31, respectively.

Allowance for doubtful accounts When receivables are recorded,

an allowance for doubtful accounts in an amount equal to anticipated

future write-offs is recognized. The allowance includes provisions

for uncollectible finance charges and other credit fees. We estimate

future write-offs based on delinquencies, risk scores, aging trends,

industry risk trends and our historical experience. The allowance

for doubtful accounts was $419 million or 6.8 percent of year-end

receivables at January 31, 2004, compared to $399 million or

6.7 percent of year-end receivables at February 1, 2003. Management

believes that the allowance for doubtful accounts is adequate to

cover anticipated losses in our credit card accounts receivable under

current conditions; however, significant deterioration in any of the

factors mentioned above or in general economic conditions could

materially change these expectations. Our accounts receivable

and related allowance are described in the Notes to Consolidated

Financial Statements on page 31.

Pension and postretirement health care accounting We fund and

maintain three qualified defined benefit pension plans and maintain

certain related non-qualified plans as well. Our pension costs are

determined based on actuarial calculations using key assumptions

including our expected long-term rate of return on qualified plan

assets, discount rate and our estimate of future compensation

increases. We also maintain a postretirement health care plan for

certain retired employees. Postretirement health care costs are

calculated based on actuarial calculations using key assumptions

including a discount rate and health care cost trend rates. Our pension

and postretirement health care benefits are further described in

the Notes to Consolidated Financial Statements on pages 36-37.

Insurance/self-insurance We retain a portion of the risk related

to certain general liability, workers’ compensation, property loss

and employee medical and dental claims. Liabilities associated

with these losses are calculated for claims filed, and claims

incurred but not yet reported, at our estimate of their ultimate

cost, based upon analysis of historical data and actuarial estimates.

General liability and workers’ compensation liabilities are recorded

at our estimate of their net present value; other liabilities are not

discounted. Our expected loss accruals are based on estimates,

and while we believe the amounts accrued are adequate, the

ultimate loss may differ from the amounts provided. We maintain

stop-loss coverage to limit the exposure related to certain risks.

Income taxes We pay income taxes based on the tax statutes,

regulations and case law of the various jurisdictions in which we

operate. Our effective income tax rate was 37.8 percent, 38.2 percent

and 38.0 percent in 2003, 2002 and 2001, respectively. The income

tax provision includes estimates for certain unresolved matters in

dispute with state and federal tax authorities. Management

believes the resolution of such disputes will not have a material

impact on our financial statements. Our effective income tax rate

in 2004 is expected to be approximately 37.8 percent. Our income

taxes are further described in the Notes to Consolidated Financial

Statements on page 34.

22

Analysis of Financial Condition

Liquidity and Capital Resources

Our financial condition remains strong.

In assessing our financial condition,

management considers factors such

as cash flows provided by operations,

capital expenditures and debt service

obligations. Cash flow provided by

operations increased to $3.2 billion

in 2003 from $1.6 billion in 2002,

primarily due to a smaller increase in

our gross accounts receivable balance

and a higher net income.

During 2003, our total gross year-

end receivables increased 3.9 percent,

or $231 million, to $6,195 million. The

growth in year-end receivables was

driven by modest growth in issuance and usage of the Target Visa

credit card during 2003. Average total receivables in 2003 increased

21 percent reflecting the substantial growth of the Target Visa

credit card portfolio throughout 2002.

During 2003, inventory levels increased $583 million, or

12.2 percent. This growth was more than fully funded by the $764

million increase in accounts payable over the same period. The

increase in inventory was primarily a result of our store square

footage growth.

In January 1999 and March 2000, our Board of Directors

authorized the aggregate repurchase of $2 billion of our common

stock. Since that time, we have repurchased a total of 42 million

shares of our common stock at a total cost of $1,247 million

($29.39 per share), net of the premium from exercised and expired

put options. In 2001, common stock repurchases were essentially

suspended. Consequently, common stock repurchases did not

have a material impact on our 2003 or 2002 net earnings and

financial position.

Our financing strategy is to ensure liquidity and access to

capital markets, to manage the amount of floating-rate debt and

to maintain a balanced spectrum of debt maturities. Within these

parameters, we seek to minimize our cost of borrowing.

A key to our access to liquidity and capital markets is main-

taining strong investment-grade debt ratings.

Credit Ratings

StandardMoody’s and Poor’s Fitch

Long-term debt A2 A+ A

Commercial paper P-1 A-1 F1

Securitized receivables Aaa AAA n/a

Interest Coverage Ratio

We view interest coverage as an important indicator of our credit-

worthiness.

Interest coverage ratio represents the ratio of pre-tax earnings

before fixed charges to fixed charges (interest expense and the

interest portion of rent expense). Our interest coverage ratio was

5.5x, 4.9x and 4.7x in 2003, 2002 and 2001, respectively.

Further liquidity is provided by $1.6 billion of committed lines

of credit obtained through a group of 26 banks. Of these credit

lines, an $800 million credit facility expires in June 2004 but

includes a one-year term-out option to June 2005. The remaining

$800 million credit facility expires in June 2008. There were no

balances outstanding at any time during 2003 or 2002 under these

agreements. These committed credit lines as well as most of our

long-term debt obligations contain certain financial covenants. We

are, and expect to remain, well within the compliance requirements

of these covenants. No material debt instrument contains provisions

requiring acceleration of payment upon a debt rating downgrade.

Management believes that cash flows from operations, proceeds

from long-term financing activities and issuance of short-term debt

will be sufficient to fund any seasonal buildup in inventories and meet

other cash requirements, including the refinancing of existing long-

term debt, growth in receivables and projected capital expenditures.

Capital Expenditures

Capital expenditures were $3,004

million in 2003, compared with

$3,221 million in 2002 and $3,163

million in 2001. Our modestly lower

spending level in 2003 is due to a

larger mix of leased stores and our

ability to accomplish our expansion

plans with less capital. Investment in

Target accounted for 90 percent of

capital expenditures in 2003 and

92 percent of capital expenditures in

both 2002 and 2001. Net property

and equipment increased $1,662

million in 2003, compared with an

increase of $1,774 million in 2002.

Over the past five years, Target’s net retail square footage has

grown at a compound annual rate of 10 percent, at the higher end

of our objective of 8 to 10 percent in new net growth annually.

Approximately 74 percent and 66 percent of total capital

expenditures in 2003 and 2002, respectively, were for new stores,

expansions and remodels. Other capital investments were for

information system hardware and software, distribution capacity

and other infrastructure to support store growth, primarily at Target.

’99 ’00 ’01 ’02 ’03

$1,9

18

$2,5

28

$3,1

63

$3,2

21

$3,0

04

3,000

2,250

1,500

750

Capital

Expenditures

(millions)

’99 ’00 ’01 ’02 ’03

$2,4

03

$2,1

34

$2,0

12

$1,5

90

$3,1

60

3,000

2,250

1,500

750

Cash Flow from

Operations

(millions)

23

Number of Stores

February 1, January 31,2003 Opened Closed 2004

Target* 1,147 101 23 1,225

Mervyn’s 264 3 1 266

Marshall Field’s 64 – 2 62

Total 1,475 104 26 1,553

*Target includes 118 and 94 SuperTargets at January 31, 2004 and February 1,2003, respectively.

In 2004, we expect to invest $3.2 billion to $3.4 billion, mostly

in new square footage for Target stores and the distribution

infrastructure and systems to support this growth. Our estimated

2004 store opening program at Target reflects net square footage

growth of approximately 8 to 9 percent, or 95 to 100 total new

stores partially offset by closings and relocations. In addition, we

expect to remodel approximately 70 stores in 2004.

Owned and Leased Store Locations

At year-end 2003, owned, leased and “combined” (generally an

owned building on leased land) store locations by operating seg-

ment were as follows:

Owned Leased Combined Total

Target 987 87 151 1,225

Mervyn’s 155 62 49 266

Marshall Field’s 49 11 2 62

Total 1,191 160 202 1,553

Commitments and Contingencies

At January 31, 2004, our debt, lease and royalty contractual obli-

gations were as follows:

Payments Due by Period

(millions) Less than 1-3 3-5 After 5Contractual Obligations Total 1 Year Years Years Years

Long-term debt* $10,828 $ 857 $1,254 $2,774 $ 5,943

Interest payments** 6,062 587 1,103 912 3,460

Capital lease obligations*** 264 21 39 38 166

Operating leases*** 1,778 163 286 236 1,093

Royalties 80 42 38 – –

Contractual cash obligations $19,012 $1,670 $2,720 $3,960 $10,662

*Required principal payments only. Excludes SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” fair market valueadjustments recorded in long-term debt.

** Includes payments on $1.5 billion of floating rate long-term debt securedby credit card receivables, of which $750 million matures in July 2004 and$750 million matures in 2007. These payments are calculated assumingrates of 1.25%, 2.25%, 3.25% and 4.25% for 2004, 2005, 2006 and 2007,respectively. Excludes payments received or made relating to interest rateswaps discussed on pages 33-34.

***Total contractual lease payments.

Commitments for the purchase, construction, lease or remodel-

ing of real estate, facilities and equipment were approximately

$545 million at year-end 2003.

Throughout the year, we enter into various commitments to

purchase inventory. In addition to the accounts payable reflected in

our Statements of Financial Position on page 27, we had commit-

ments with various vendors for the purchase of inventory as of

January 31, 2004. The previous table excludes these commitments

because these purchase commitments are cancelable by their terms.

Legal Proceedings

We are exposed to claims and litigation arising out of the ordinary

course of business and use various methods to resolve those matters

in a manner that serves the best interest of our shareholders and

other constituents. The dispute resolution methods that we use

include vigorous litigation, when necessary, and alternatives such

as settlement discussions, where appropriate, to reduce the costs

of litigation. Our policy is to fully disclose pending lawsuits and

other known claims that we expect may have a material impact

on our results of operations or financial condition. After consulting

with legal counsel, management does not believe that any currently

identified claims or litigation meet this criterion.

Market Risk

Our exposure to market risk results primarily from fluctuations in

interest rates on our debt obligations and from the effect of equity

market returns on our non-qualified defined contribution plans.

We hold derivative instruments primarily to manage our exposure

to these risks and all derivative instruments are matched against

specific debt obligations or other liabilities. There have been no

material changes in the primary risk exposures or management of

the risks since the prior year. Our debt and interest rate swap

instruments outstanding at January 31, 2004, including applicable

interest rates, are discussed in the Notes to Consolidated Financial

Statements on pages 33-34.

The annualized effect of a one percentage point change in

floating interest rates on our interest rate swap agreements and

other floating rate debt obligations at January 31, 2004, would be

to change interest expense by approximately $36 million. The

annualized effect of a one percentage point change in equity market

returns on our non-qualified defined contribution plans (inclusive

of the effect of derivative instruments used to hedge or manage

these exposures) would not be significant.

24

Performance Objectives

Shareholder Return

Our primary objective is to maximize

shareholder value over time through

a combination of share price appreci-

ation and dividend income while

maintaining a prudent and flexible

capital structure. Our total annualized

return to shareholders (including

reinvested dividends) over the last five

years averaged 4.2 percent, returning

about $123 for each $100 invested in

our stock at the beginning of this

period. The peer group we refer to in

the adjacent graph represents those

companies included in the S&P 500

Retailing and S&P 500 Food and Drug

Retailing Indices, and is the group we

refer to in our proxy statement.

Measuring Value Creation

We measure value creation internally using a form of Economic

Value Added (EVA), which we define as after-tax segment profit

less a capital charge for all investment employed. The capital

charge is an estimate of our after-tax cost of capital adjusted for

the age of our stores, recognizing that mature stores inherently

have higher returns than newly opened stores. We use a benchmark

of 9 percent for the estimated after-tax cost of capital invested in

our retail operations and a benchmark of 5 percent for capital

invested in our credit card operations, as a result of its ability to

support higher debt levels. We expect to continue to generate

returns in excess of these benchmarks, thereby producing EVA.

EVA is used to evaluate our performance and to guide capital

investment decisions. A significant portion of executive incentive

compensation is tied to the achievement of targeted levels of

annual EVA generation. We believe that managing our business

with a focus on EVA helps achieve our objective of average annual

earnings per share growth of 15 percent or more over time. Earnings

per share has grown at a compound annual rate of 15 percent over

the last five years.

New Accounting Pronouncements

2004 Adoptions

In January 2003, the Financial Accounting Standards Board issued

Interpretation No. 46, “Consolidation of Variable Interest Entities, an

interpretation of Accounting Research Bulletin No. 51” (FIN No. 46).

FIN No. 46 will be effective no later than the end of the first

reporting period that ends after March 15, 2004. FIN No. 46 requires

the consolidation of entities in which an enterprise absorbs a

majority of the entity’s expected losses, receives a majority of the

entity’s expected residual returns, or both, as a result of ownership,

contractual or other financial interest in the entity. Currently, entities

are generally consolidated by an enterprise when it has a controlling

financial interest through ownership of a majority voting interest in

the entity. We do not expect the adoption of FIN No. 46 to have a

material impact on our net earnings, cash flows or financial position.

2003 Adoptions

In the first quarter of 2003, we adopted EITF No. 02-16, “Accounting

by a Customer (Including a Reseller) for Certain Consideration

Received from a Vendor.” Under the new guidance, cash consider-

ation received from a vendor is presumed to be a reduction of the

prices of the vendor’s products or services and should be classified

as a reduction in cost of sales. If the cash consideration is for assets

or services delivered to the vendor, it should be characterized as

revenue. If the cash consideration is a reimbursement of costs

incurred to sell the vendor’s products, it should be characterized

as a reduction of that cost. This guidance had no material impact

on sales, cash flows or financial position for any period, and had

a slight negative impact on net earnings. Our accounting policy

regarding vendor income is discussed in the Notes to Consolidated

Financial Statements on page 30.

In the first quarter of 2003, we adopted SFAS No. 123,

“Accounting for Stock-Based Compensation,” in accordance with

the prospective transition method prescribed in SFAS No. 148,

“Accounting for Stock-Based Compensation — Transition and

Disclosure.” The fair value based method has been applied

prospectively to awards granted subsequent to February 1, 2003

(the last day of our 2002 fiscal year). The adoption of this method

increased compensation expense by less than $.01 per share in

2003. Our accounting policy regarding stock-based compensation

is discussed in the Notes to Consolidated Financial Statements

on page 30.

In the first quarter of 2003, we adopted SFAS No. 143,

“Accounting for Asset Retirement Obligations.” The adoption did

not have an impact on current year or previously reported net

earnings, cash flows or financial position.

In the first quarter of 2003, we adopted SFAS No. 146,

“Accounting for Costs Associated with Exit or Disposal Activities.”

SFAS No. 146 requires that a liability for a cost associated with an

exit or disposal activity be recognized when the liability is incurred

5 Year 10 Year

4%

–1% 2

%

23%

11%

25

15

20

10

5

0

13%

Total Annualized

Return

Target

S&P 500

Peer group

25

instead of recognizing the liability at the date of commitment to

an exit plan as was previously allowed. The adoption of SFAS

No. 146 did not have a material impact on current year or previously

reported net earnings, cash flows or financial position.

In the second quarter of 2003, we adopted SFAS No. 149,

“Amendment of Statement 133 on Derivative Instruments and

Hedging Activities.” SFAS No. 149 amends and clarifies accounting

for derivative instruments, and is effective for contracts entered

into or modified after June 30, 2003. The adoption of SFAS

No. 149 had no material impact on current year or previously

reported net earnings, cash flows or financial position.

In the third quarter of 2003, we adopted SFAS No. 150,

“Accounting for Certain Financial Instruments with Characteristics

of both Liabilities and Equity.” SFAS No. 150 clarifies the classification

and measurement of certain financial instruments with characteristics

of both liabilities and equity, and is effective for financial instruments

entered into or modified after May 31, 2003, or otherwise for the

first interim period beginning after June 15, 2003. The adoption of

SFAS No. 150 had no material impact on current year or previously

reported net earnings, cash flows or financial position.

In the fourth quarter of 2003, we adopted EITF’s Issue

No. 03-10 “Application of Issue 02-16 by Resellers to Sales Incentives

Offered to Consumers by Manufacturers” (EITF No. 03-10) which

amends EITF No. 02-16. According to the amended guidance, if

certain criteria are met, consideration received by a reseller in the

form of reimbursement from a vendor for honoring the vendor’s

sales incentives offered directly to consumers (i.e. manufacturer’s

coupons) should not be recorded as a reduction of the cost of the

reseller’s purchases from the vendor. The adoption of EITF No. 03-10

did not have a material impact on current year or previously reported

net earnings, cash flows or financial position. Our accounting policy

regarding vendor income is discussed in the Notes to Consolidated

Financial Statements on page 30.

In the fourth quarter of 2003, we adopted SFAS No. 132(R),

“Employers’ Disclosures about Pensions and Other Postretirement

Benefits—an amendment of FASB Statements No. 87, 88 and 106,”

which revises the annual and interim disclosure requirements

about pension and other postretirement benefits.

2002 Adoptions

In the first quarter of 2002, we adopted SFAS No. 142, “Goodwill

and Other Intangible Assets,” which superseded Accounting

Principles Board (APB) Opinion No. 17, “Intangible Assets.” Under

the new statement, goodwill and intangible assets that have

indefinite useful lives are no longer amortized but rather reviewed

at least annually for impairment, or more frequently if impairment

indicators arise. In both 2003 and 2002, the adoption of this

statement reduced annual amortization expense by approximately

$10 million (less than $.01 per share). Our accounting policy

regarding intangible assets is discussed in the Notes to Consolidated

Financial Statements on page 32.

In the first quarter of 2002, we adopted SFAS No. 144,

“Accounting for the Impairment or Disposal of Long-Lived Assets.”

The guidance requires companies to review long-lived assets when

events or changes in circumstances indicate that the carrying value

of the asset may not be recoverable. In both 2003 and 2002,

impairment losses resulted in a financial statement impact of less

than $.01 per share. Our accounting policy regarding impairment

of long-lived assets is discussed in the Notes to Consolidated

Financial Statements on page 32.

In the first quarter of 2002, we adopted SFAS No. 145,

“Rescission of FASB Statements No. 4, 44 and 64, Amendment of

FASB Statement No. 13, and Technical Corrections.” Previously, all

gains and losses from the early extinguishment of debt were

required to be aggregated and classified as an extraordinary item

in the Consolidated Results of Operations, net of the related tax

effect. Under SFAS No. 145, gains and losses from the early

extinguishment of debt are included in interest expense. Prior year

extraordinary items have been reclassified to reflect this change.

The adoption of SFAS No. 145 had no impact on net earnings, cash

flows or financial position.

Forward-looking Statements

This Annual Report, including the preceding Management’s

Discussion and Analysis, contains forward-looking statements

regarding our performance, liquidity and the adequacy of our capital

resources. Those statements are based on our current assumptions

and expectations and are subject to certain risks and uncertainties

that could cause actual results to differ materially from those

projected. We caution that the forward-looking statements are

qualified by the risks and challenges posed by increased competition

(including the effects of competitor liquidation activities), shifting

consumer demand, changing consumer credit markets, changing

health care costs, changing capital markets and general economic

conditions, hiring and retaining effective team members, sourcing

merchandise from domestic and international vendors, investing

in new business strategies, achieving our growth objectives, the

review of strategic alternatives, the outbreak of war and other

significant national and international events, and other risks and

uncertainties. As a result, while we believe that there is a reasonable

basis for the forward-looking statements, you should not place

undue reliance on those statements. You are encouraged to review

Exhibit (99)C attached to our Form 10-K Report for the year-ended

January 31, 2004, which contains additional important factors that

may cause actual results to differ materially from those projected

in the forward-looking statements.

26

(millions, except per share data) 2003 2002 2001

Sales $46,781 $42,722 $39,114

Net credit card revenues 1,382 1,195 712

Total revenues 48,163 43,917 39,826

Cost of sales 31,790 29,260 27,143

Selling, general and administrative expense 10,696 9,416 8,461

Credit card expense 838 765 463

Depreciation and amortization 1,320 1,212 1,079

Interest expense 559 588 473

Earnings before income taxes 2,960 2,676 2,207

Provision for income taxes 1,119 1,022 839

Net earnings $ 1,841 $ 1,654 $ 1,368

Basic earnings per share $ 2.02 $ 1.82 $ 1.52

Diluted earnings per share $ 2.01 $ 1.81 $ 1.50

Weighted average common shares outstanding:

Basic 911.0 908.0 901.5

Diluted 917.1 914.0 909.8

See Notes to Consolidated Financial Statements throughout pages 30-39.

CONSOLIDATED RESULTS OF OPERATIONS

27

January 31, February 1,(millions) 2004 2003

Assets

Cash and cash equivalents $ 716 $ 758

Accounts receivable, net 5,776 5,565

Inventory 5,343 4,760

Other 1,093 852

Total current assets 12,928 11,935

Property and equipment

Land 3,629 3,236

Buildings and improvements 13,091 11,527

Fixtures and equipment 5,432 4,983

Construction-in-progress 995 1,190

Accumulated depreciation (6,178) (5,629)

Property and equipment, net 16,969 15,307

Other 1,495 1,361

Total assets $31,392 $28,603

Liabilities and shareholders’ investment

Accounts payable $ 5,448 $ 4,684

Accrued liabilities 1,618 1,545

Income taxes payable 382 319

Current portion of long-term debt and notes payable 866 975

Total current liabilities 8,314 7,523

Long-term debt 10,217 10,186

Deferred income taxes and other 1,796 1,451

Shareholders’ investment

Common stock* 76 76

Additional paid-in-capital 1,341 1,256

Retained earnings 9,645 8,107

Accumulated other comprehensive income 3 4

Total shareholders’ investment 11,065 9,443

Total liabilities and shareholders’ investment $31,392 $28,603

*Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 911,808,051 shares issued and outstanding at January 31, 2004; 909,801,560 sharesissued and outstanding at February 1, 2003.

*Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at January 31, 2004 or February 1, 2003.

See Notes to Consolidated Financial Statements throughout pages 30-39.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

28

(millions) 2003 2002 2001

Operating activities

Net earnings $ 1,841 $ 1,654 $ 1,368

Reconciliation to cash flow:

Depreciation and amortization 1,320 1,212 1,079

Bad debt provision 532 460 230

Deferred tax provision 249 248 49

Loss on disposal of fixed assets, net 54 67 52

Other non-cash items affecting earnings 11 159 160

Changes in operating accounts providing/(requiring) cash:

Accounts receivable (744) (2,194) (1,193)

Inventory (583) (311) (201)

Other current assets (255) 15 (91)

Other assets (196) (174) (178)

Accounts payable 764 524 584

Accrued liabilities 57 (21) 29

Income taxes payable 91 (79) 124

Other 19 30 –

Cash flow provided by operations 3,160 1,590 2,012

Investing activities

Expenditures for property and equipment (3,004) (3,221) (3,163)

Increase in receivable-backed securities – – (174)

Proceeds from disposals of property and equipment 85 32 32

Other – – (5)

Cash flow required for investing activities (2,919) (3,189) (3,310)

Financing activities

Decrease in notes payable, net (100) – (808)

Additions to long-term debt 1,200 3,153 3,250

Reductions of long-term debt (1,172) (1,071) (793)

Dividends paid (237) (218) (203)

Repurchase of stock – (14) (20)

Other 26 8 15

Cash flow (required for)/provided by financing activities (283) 1,858 1,441

Net (decrease)/increase in cash and cash equivalents (42) 259 143

Cash and cash equivalents at beginning of year 758 499 356

Cash and cash equivalents at end of year $ 716 $ 758 $ 499

Amounts presented herein are on a cash basis and therefore may differ from those shown in other sections of this Annual Report. Cash paid for income taxeswas $781 million, $853 million and $666 million during 2003, 2002 and 2001, respectively. Cash paid for interest (including interest capitalized) was $550million, $526 million and $477 million during 2003, 2002 and 2001, respectively.

See Notes to Consolidated Financial Statements throughout pages 30-39.

CONSOLIDATED STATEMENTS OF CASH FLOWS

29

AccumulatedCommon Additional Other

Stock Common Paid-in Retained Comprehensive(millions, except footnotes) Shares Stock Capital Earnings Income Total

February 3, 2001 897.8 $75 $ 902 $5,542 $ – $ 6,519

Consolidated net earnings – – – 1,368 – 1,368

Dividends declared – – – (203) – (203)

Repurchase of stock (.5) – – (20) – (20)

Issuance of stock for ESOP 2.6 – 89 – – 89

Stock options and awards:

Tax benefit – – 63 – – 63

Proceeds received, net 5.3 – 44 – – 44

February 2, 2002 905.2 75 1,098 6,687 – 7,860

Consolidated net earnings – – – 1,654 – 1,654

Other comprehensive income – – – – 4 4

Total comprehensive income 1,658

Dividends declared – – – (218) – (218)

Repurchase of stock (.5) – – (16) – (16)

Issuance of stock for ESOP 3.0 1 105 – – 106

Stock options and awards:

Tax benefit – – 26 – – 26

Proceeds received, net 2.1 – 27 – – 27

February 1, 2003 909.8 76 1,256 8,107 4 9,443

Consolidated net earnings – – – 1,841 – 1,841

Other comprehensive income – – – – (1) (1)

Total comprehensive income 1,840

Dividends declared – – – (246) – (246)

Repurchase of stock (1.5) – – (57) – (57)

Issuance of stock for ESOP 0.6 – 17 – – 17

Stock options and awards:

Tax benefit – – 28 – – 28

Proceeds received, net 2.9 – 40 – – 40

January 31, 2004 911.8 $76 $1,341 $9,645 $3 $11,065

Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 911,808,051 shares issued and outstanding at January 31, 2004; 909,801,560 sharesissued and outstanding at February 1, 2003; 905,164,702 shares issued and outstanding at February 2, 2002.

In January 1999 and March 2000, our Board of Directors authorized the aggregate repurchase of $2 billion of our common stock. In 2001, common stockrepurchases under our program were essentially suspended. Our common stock repurchases are recorded net of the premium received from put options.Repurchases are made primarily in open market transactions, subject to market conditions.

Our common stock repurchase program has included the sale of put options that entitle the holder to sell shares of our common stock to us, at a specifiedprice, if the holder exercises the option. No put options were sold during or were outstanding at the end of 2003, 2002 or 2001.

Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at January 31, 2004, February 1, 2003 or February 2, 2002.

Junior Preferred Stock Rights In 2001, we declared a distribution of preferred share purchase rights. Terms of the plan provide for a distribution of onepreferred share purchase right for each outstanding share of our common stock. Each right will entitle shareholders to buy one twelve-hundredth of a shareof a new series of junior participating preferred stock at an exercise price of $125.00, subject to adjustment. The rights will be exercisable only if a person orgroup acquires ownership of 20 percent or more of our common stock or announces a tender offer to acquire 30 percent or more of our common stock.

Dividends Dividends declared per share were $0.27, $0.24 and $0.225 in 2003, 2002 and 2001, respectively.

See Notes to Consolidated Financial Statements throughout pages 30-39.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT

30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Accounting Policies

Organization Target Corporation (the Corporation) is a general

merchandise retailer, comprised of three operating segments:

Target, Mervyn’s and Marshall Field’s. Our segments are primarily

determined by the nature of the products and services offered to

our guests. Target, an upscale discount chain located in 47 states,

contributed 86 percent of our 2003 total revenues. Mervyn’s, a

middle-market promotional department store located in 14 states

in the West, South and Midwest, contributed 7 percent of total

revenues. Marshall Field’s (including stores formerly named

Dayton’s and Hudson’s), a traditional department store located in

8 states in the upper Midwest, contributed 5 percent of total

revenues. Management measures segment performance based on

pre-tax segment profit, which includes credit card operations.

Credit card operations drive revenue growth at each segment and

are considered an integral component of our retail operations.

Business segment comparisons are presented on page 38.

Consolidation The financial statements include the balances of

the Corporation and its subsidiaries after elimination of material

intercompany balances and transactions. All material subsidiaries

are wholly owned.

Use of Estimates The preparation of our financial statements, in

conformity with accounting principles generally accepted in the

United States (GAAP), requires management to make estimates

and assumptions that affect the reported amounts in the financial

statements and accompanying notes. Actual results may differ

from those estimates.

Fiscal Year Our fiscal year ends on the Saturday nearest January 31.

Unless otherwise stated, references to years in this report relate

to fiscal years rather than to calendar years. Fiscal years 2003,

2002 and 2001 each consisted of 52 weeks.

Reclassifications Certain prior year amounts have been reclassified

to conform to the current year presentation.

Stock-based Compensation In 2003, we adopted Statement of

Financial Accounting Standards (SFAS) No. 123, “Accounting for

Stock-Based Compensation,” in accordance with the prospective

transition method prescribed in SFAS No. 148, “Accounting for

Stock-Based Compensation—Transition and Disclosure” and began

recognizing compensation expense for stock options granted

during the year. Compensation expense is reflected in selling,

general and administrative expenses. Prior to 2003, we accounted

for stock option awards under the intrinsic value method prescribed

in Accounting Principles Board (APB) No. 25, “Accounting for

Stock Issued to Employees” which resulted in no compensation

expense because the exercise price of the stock options was equal

to the fair market value of the underlying stock on the grant date.

The pro forma impact of accounting for those awards at fair value

is disclosed on page 35.

Revenues

Revenue from retail sales is recognized at the time of sale. Com-

missions earned on sales generated by leased departments are

included within sales and were $38 million in 2003, $33 million in

2002 and $37 million in 2001. Net credit card revenues are comprised

of finance charges and late fees from credit card holders, as well as

third-party merchant fees earned from the use of our Target Visa

credit card. Net credit card revenues are recognized according to the

contractual provisions of each applicable credit card agreement.

If an account is written-off, any uncollected finance charges or late

fees are recorded as a reduction of credit card revenue. The amount

of our retail sales charged to our credit cards was $5.3 billion,

$5.4 billion and $5.6 billion in 2003, 2002 and 2001, respectively. Prior

to August 22, 2001, net credit card revenues are net of the payments

made to holders of publicly held receivable-backed securities.

Consideration Received from Vendors

We collect vendor income primarily as a result of our promotional,

advertising and compliance programs. Promotional and advertising

allowances are intended to offset our costs of promoting and selling

the vendor’s merchandise in our stores and are recognized when we

incur the cost or complete the promotion. Under our compliance

programs, vendors are charged for merchandise shipments that do

not meet our requirements, such as late or incomplete shipments,

and we record these allowances when the violation occurs. Vendor

income either reduces our inventory costs or our operating expenses

based on the requirements of Emerging Issues Task Force (EITF)

Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for

Certain Consideration Received from a Vendor” as discussed below.

In the first quarter of 2003, we adopted EITF No. 02-16. In

accordance with EITF No. 02-16, certain vendor income items have

been reclassified from operating expenses to inventory purchases

and recognized into income as the vendors’ merchandise is sold.

The guidance was applied on a prospective basis only as required

by EITF No. 02-16. This reclassification had no material impact on

sales, cash flows or financial position for any period, and had a

slight negative impact on net earnings.

In the fourth quarter of 2003, we adopted EITF No. 03-10,

“Application of Issue 02-16 by Resellers to Sales Incentives Offered

to Consumers by Manufacturers,” which amends EITF No. 02-16.

The adoption of EITF No. 03-10 did not have a material impact on

net earnings, cash flows or financial position. The requirements of

EITF No. 02-16 and EITF No. 03-10 are discussed in Management’s

Discussion and Analysis on pages 24-25.

Buying and Occupancy Expenses

Buying expenses primarily consist of salaries and expenses incurred

by the Corporation’s merchandising operations, while our occupancy

expenses primarily consist of rent, depreciation, property taxes

and other operating costs of our retail and distribution facilities.

Buying and occupancy expenses classified in selling, general and

administrative expenses were $1.5 billion, $1.4 billion and $1.2 billion

in 2003, 2002 and 2001, respectively. In addition, we recorded

$1 billion, $934 million and $814 million of depreciation expense

for our retail and distribution facilities in 2003, 2002 and 2001,

respectively.

31

Advertising Costs

Advertising costs, included in selling, general and administrative

expense, are expensed as incurred and were $1,249 million, $962

million and $924 million for 2003, 2002 and 2001, respectively.

Advertising vendor income recorded within advertising expense

was approximately $78 million, $251 million and $231 million for

2003, 2002 and 2001, respectively.

Earnings per Share

Basic earnings per share (EPS) is net earnings divided by the average

number of common shares outstanding during the period. Diluted

EPS includes the incremental shares that are assumed to be issued

on the exercise of stock options. Shares issuable upon exercise of

approximately 4.5 million options outstanding at January 31, 2004

were not included in the dilutive earnings per share calculation

because the effect would have been antidilutive. At February 1,

2003, 13.2 million shares were excluded from the dilutive earnings

per share calculation. No such shares were excluded from the

dilutive earnings per share calculation at February 2, 2002.

Basic EPS Diluted EPS

(millions, exceptper share data) 2003 2002 2001 2003 2002 2001

Net earnings $1,841 $1,654 $1,368 $1,841 $1,654 $1,368

Basic weighted average common shares outstanding 911.0 908.0 901.5 911.0 908.0 901.5

Stock options – – – 6.1 6.0 8.3

Weighted average common sharesoutstanding 911.0 908.0 901.5 917.1 914.0 909.8

Earnings per share $ 2.02 $ 1.82 $ 1.52 $ 2.01 $ 1.81 $ 1.50

Other Comprehensive Income

Other comprehensive income includes revenues, expenses, gains

and losses that are excluded from net earnings under GAAP. In

2003 and 2002, it primarily included gains and losses on certain

hedge transactions and the change in our minimum pension

liability, net of related taxes.

Cash Equivalents

Cash equivalents represent short-term investments with a maturity

of three months or less from the time of purchase and were

$244 million, $357 million and $84 million in 2003, 2002 and 2001,

respectively.

Accounts Receivable and Receivable-backed Securities

Accounts receivable is recorded net of an allowance for expected

losses. The allowance, recognized in an amount equal to the antici-

pated future write-offs based on delinquencies, risk scores, aging

trends, industry risk trends and our historical experience, was $419

million at January 31, 2004 and $399 million at February 1, 2003.

Through our special purpose subsidiary, Target Receivables

Corporation (TRC), we transfer, on an ongoing basis, substantially all

of our receivables to the Target Credit Card Master Trust (the Trust)

in return for certificates representing undivided interests in the Trust’s

assets. TRC owns the undivided interest in the Trust’s assets, other

than the Trust’s assets securing the financing transactions entered

into by the Trust and the 2 percent of Trust assets held by Retailers

National Bank (RNB). RNB is a wholly owned subsidiary of the

Corporation that also services receivables. The Trust assets and

the related income and expenses are reflected in each operating

segment’s assets and operating results based on the origin of the

credit card giving rise to the receivable.

Concurrent with our August 22, 2001 issuance of receivable-

backed securities from the Trust, SFAS No. 140 (which replaced

SFAS No. 125, “Accounting for Transfers and Servicing of Financial

Assets and Extinguishments of Liabilities,” in its entirety) became

the accounting guidance applicable to such transactions. While this

accounting requires secured financing treatment of the securities

issued by the Trust on our consolidated financial statements, the

assets within the Trust are still considered sold to our wholly owned,

bankruptcy remote subsidiary, TRC, and are not available to general

creditors of the Corporation.

Beginning on August 22, 2001, our consolidated financial

statements reflected the obligation to holders of previously sold

receivable-backed securities as debt of TRC and the receivables

at fair value in place of the previously recorded retained interests

related to the sold securities. This resulted in a pre-tax charge of

$67 million ($.05 per share). On August 22, 2001, the Trust’s entire

portfolio of receivables was reflected on our consolidated financial

statements at its fair value, which was based upon the expected

performance of the underlying receivables portfolio. At that point

in time, fair value was equivalent in amount to face value, net of

an appropriate allowance.

Prior to August 22, 2001, income on the receivable-backed

securities was accrued based on the effective interest rate applied to

its cost basis, adjusted for accrued interest and principal paydowns.

We monitored impairment of receivable-backed securities based

on fair value. Permanent impairments were charged to earnings

through credit expense in the period in which it was determined

that the receivable-backed securities’ carrying value was greater

than their fair value. Permanent impairment charges on the

receivables underlying the receivable-backed securities portfolio

were $89 million in 2001. Permanent impairment charges in 2001

include only those losses prior to the consolidation of our special

purpose entity on August 22, 2001.

Inventory

Substantially all of our inventory and the related cost of sales is

accounted for under the retail inventory accounting method using

the last-in, first-out (LIFO) basis. Inventory is stated at the lower of

LIFO cost or market. The cumulative LIFO provision was $25 million

and $52 million at year-end 2003 and 2002, respectively.

Inventory

January 31, February 1,(millions) 2004 2003

Target $4,282 $3,748

Mervyn’s 486 486

Marshall Field’s 326 324

Other 249 202

Total inventory $5,343 $4,760

32

Property and Equipment

Property and equipment are recorded at cost, less accumulated

depreciation. Depreciation is computed using the straight-line

method over estimated useful lives. Depreciation expense for the

years 2003, 2002 and 2001 was $1,286 million, $1,183 million and

$1,049 million, respectively. Accelerated depreciation methods are

generally used for income tax purposes. Repair and maintenance

costs were $453 million, $416 million and $386 million in 2003,

2002 and 2001, respectively.

Estimated useful lives by major asset category are as follows:

Asset Life (in years)

Buildings and improvements 8 – 39

Fixtures and equipment 4 – 15

Computer hardware and software 4

We adopted SFAS No. 144, “Accounting for the Impairment

or Disposal of Long-Lived Assets” in the first quarter of 2002. In

accordance with this guidance, all long-lived assets are reviewed

when events or changes in circumstances indicate that the carrying

value of the asset may not be recoverable. The requirements of

SFAS No. 144 are discussed in Management’s Discussion and

Analysis on page 25.

We review most assets at the store level, which is the lowest

level of assets for which there are identifiable cash flows. The

carrying amount of the store assets is compared to the expected

undiscounted future cash flows to be generated by those assets

over the estimated remaining useful life of the primary asset. Cash

flows are projected for each store based upon historical results and

expectations. In cases where the expected future cash flows and

fair value are less than the carrying amount of the assets, those

stores are considered impaired and the assets are written down

to fair value. Fair value is based on appraisals or other reasonable

methods to estimate fair value. Impairment losses are included in

depreciation expense for held and used assets and included within

selling, general and administrative expense on assets classified

as held for sale. Our fixed asset impairment tests, performed in

accordance with the applicable accounting guidance, assumed each

of our segments would continue indefinitely. Changes in these

assumptions could impact the results of our analysis. In both 2003

and 2002, impairment losses resulted in a financial statement

impact of less than $.01 per share.

Goodwill and Intangible Assets

Goodwill and intangible assets are recorded within other long-term

assets at cost less accumulated amortization. Amortization is

computed on intangible assets with definite useful lives using the

straight-line method over estimated useful lives that range from

three to fifteen years. Amortization expense for the years 2003,

2002 and 2001 was $34 million, $29 million and $30 million,

respectively. At January 31, 2004 and February 1, 2003, net good-

will and intangible assets were $364 million and $376 million,

respectively. These assets included $155 million of goodwill and

intangible assets with indefinite useful lives in both years, principally

associated with Marshall Field’s and target.direct.

As required, we adopted SFAS No. 142, “Goodwill and Other

Intangible Assets,” during the first quarter of 2002. In 2003 and

2002, the adoption of this statement reduced annual amortization

expense by approximately $10 million (less than $.01 per share).

The requirements of SFAS No. 142 are discussed in Management’s

Discussion and Analysis on page 25.

Discounted cash flow models were used in determining fair

value for the purposes of the required annual goodwill impairment

analysis. Management used other market data to validate the

results of our analysis. No impairments were recorded in 2003,

2002 and 2001 as a result of the tests performed.

Other Long-term Assets

In addition to goodwill and intangible assets discussed above, the

major components of other long-term assets at January 31, 2004

included pre-funded pension benefits, investments, deferred

financing costs and derivatives. The increase in the long-term asset

balance is primarily due to pre-funded pension contributions of

$200 million partially offset by a $43 million reduction in the value

of derivative assets that were outstanding at year-end. Our pension

plan contributions are disclosed on page 36 and our derivative

transactions are discussed on pages 33-34.

Accounts Payable

Our accounting policy is to reduce accounts payable when checks

to vendors clear the bank from which they were drawn. Out-

standing checks included in accounts payable were $1,325 million

and $1,125 million at year-end 2003 and 2002, respectively.

Lines of Credit

At January 31, 2004, two committed credit agreements totaling

$1.6 billion were in place through a group of 26 banks at specified

rates. There were no balances outstanding at any time during 2003

or 2002 under these agreements.

Commitments and Contingencies

At January 31, 2004, our obligations included notes payable, notes

and debentures of $10,925 million (discussed in detail under Long-

term Debt and Notes Payable on page 33) and the present value

of capital and operating lease obligations of $158 million and $998

million, respectively (discussed in detail under Leases on page 34).

In addition, commitments for the purchase, construction, lease or

remodeling of real estate, facilities and equipment were approxi-

mately $545 million at year-end 2003. Royalty commitments of

approximately $80 million are due during the three-year period

ending in 2007. Throughout the year, we enter into various com-

mitments to purchase inventory. In addition to the accounts payable

reflected in our Statements of Financial Position on page 27, we had

commitments with various vendors for the purchase of inventory

as of January 31, 2004. These purchase commitments are cancelable

by their terms.

33

We are exposed to claims and litigation arising out of the

ordinary course of business and use various methods to resolve these

matters in a manner that serves the best interest of our shareholders

and other constituents. The dispute resolution methods that we

use include vigorous litigation, when necessary, and alternatives

such as settlement discussions, where appropriate, to reduce the

costs of litigation. Our policy is to fully disclose pending lawsuits

and other known claims that we expect may have a material

impact on our results of operations or financial condition. However,

management, after consulting with legal counsel, does not believe

the currently identified claims and litigation meet this criterion.

Long-term Debt and Notes Payable

At January 31, 2004, no notes payable were outstanding. The average

amount of secured and unsecured notes payable outstanding

during 2003 was $377 million at a weighted average interest rate

of 1.2 percent. Notes payable balances can fluctuate significantly

during the year due to seasonal financing needs and other factors.

On October 31, 2003, our short-term borrowing reached its highest

level for the year of $1,409 million.

At February 1, 2003, $100 million of notes payable secured by

credit card receivables were outstanding. The average amount of

secured and unsecured notes payable outstanding during 2002 was

$170 million at a weighted average interest rate of 1.9 percent. During

2002, the highest level of short-term borrowing was $735 million.

At January 31, 2004, two committed credit agreements totaling

$1.6 billion were in place through a group of 26 banks at specified

rates. Of these credit lines, an $800 million credit facility expires in

June 2004 and includes a one-year term-out option to June 2005.

The remaining $800 million credit facility expires in June 2008.

There were no balances outstanding at any time during 2003 or

2002 under these agreements.

In 2003, we issued $500 million of long-term debt maturing

in 2008 at 3.38 percent, $200 million of long-term debt maturing

in 2018 at 4.88 percent and $500 million of long-term debt

maturing in 2013 at 4.00 percent. We also called or repurchased

$297 million of long-term debt with an average remaining life of

20 years and a weighted average interest rate of 7.8 percent,

resulting in a loss of $15 million (approximately $.01 per share).

In 2002, we issued $750 million of long-term debt maturing

in 2009 at 5.38 percent, $1 billion of long-term debt maturing in

2012 at 5.88 percent and $600 million of long-term debt maturing

in 2032 at 6.35 percent. Also during 2002, we issued $750 million

of floating rate debt secured by credit card receivables, bearing

interest at an initial rate of 1.99 percent maturing in 2007. We also

called or repurchased $266 million of long-term debt with an

average remaining life of 19 years and a weighted average interest

rate of 8.8 percent, resulting in a loss of $34 million ($.02 per share).

The portion of long-term debt secured by credit card receivables

is $1,500 million at January 31, 2004, $750 million of which matures

in July 2004 and is classified as current portion of long-term debt.

On February 1, 2003, we had $1,900 million of long-term debt

secured by credit card receivables, $400 million of which was

classified as current portion of long-term debt.

At year-end our debt portfolio, including adjustments related

to swap transactions discussed in the following derivatives section,

was as follows:

Long-term Debt and Notes Payable

January 31, 2004 February 1, 2003

(millions) Rate* Balance Rate* Balance

Notes payable –% $ – 1.4% $ 100

Notes and debentures:

Due 2003-2007 2.8 3,498 3.6 4,396

Due 2008-2012 5.3 4,757 5.8 4,249

Due 2013-2017 4.4 560 7.6 60

Due 2018-2022 5.3 410 9.3 217

Due 2023-2027 6.8 200 7.4 495

Due 2028-2032 6.7 1,500 6.7 1,500

Total notes payable, notes and debentures** 4.7% $10,925 5.2% $11,017

Capital lease obligations 158 144

Less: current portion (866) (975)

Long-term debt and notes payable $10,217 $10,186

*Reflects the weighted average stated interest rate as of year-end, includingthe impact of interest rate swaps.

**The estimated fair value of total notes payable and notes and debentures,using a discounted cash flow analysis based on our incremental interestrates for similar types of financial instruments, was $11,720 million atJanuary 31, 2004 and $11,741 million at February 1, 2003.

Required principal payments on long-term debt and notes

payable over the next five years, excluding capital lease obligations,

are $857 million in 2004, $502 million in 2005, $752 million in

2006, $1,323 million in 2007 and $1,451 million in 2008.

Derivatives

Our derivative instruments are primarily interest rate swaps which

hedge the fair value of certain debt by effectively converting

interest from a fixed rate to a variable rate. We also hold derivative

instruments to manage our exposure to risks associated with the

effect of equity market returns on our non-qualified defined

contribution plans as discussed on page 36.

At January 31, 2004 and February 1, 2003, interest rate swaps

were outstanding in notional amounts totaling $2,150 million and

$1,450 million, respectively. The change in market value of an

interest rate swap as well as the offsetting change in market value

of the hedged debt are recognized into earnings in the current

period. Ineffectiveness results when changes in the market value

of the hedged debt are not completely offset by changes in the

market value of the interest rate swap. There was no ineffectiveness

recognized in 2003 or 2002 related to these instruments. The fair

value of outstanding interest rate swaps and unamortized gains

from terminated interest rate swaps was $97 million at January 31,

2004 and $127 million at February 1, 2003.

During 2003, we entered into interest rate swaps with notional

amounts of $200 million, $500 million and $400 million. We also

terminated an interest rate swap with a notional amount of $400

million, resulting in a gain of $24 million that will be amortized into

income over the life of the hedged debt. During 2002, we entered

into interest rate swaps with notional amounts of $400 million and

$500 million. An interest rate swap with a notional amount of

34

$400 million matured in 2002. We also terminated an interest rate

swap with a notional amount of $500 million, resulting in a gain

of $19 million that will be amortized into income over the life of

the hedged debt. In 2003 and 2002, the gains amortized into

income were not material to our results of operations.

Prior to 2003, we entered into rate lock agreements to hedge

the exposure to variability in future cash flows of forecasted debt

transactions. During 2002, transactions contemplated by these

agreements occurred and the gain or loss was recorded as a

component of other comprehensive income. The gain or loss will

be reclassified into earnings in the periods during which the

designated hedged cash flows affect earnings. These amounts are

reflected in the Consolidated Statements of Financial Position.

Cash flows from these hedging transactions are classified with the

item being hedged.

Interest Rate Swaps Outstanding at Year-end

(millions)

January 31, 2004 February 1, 2003

Notional Receive Pay Notional Receive PayAmount Fixed Floating* Amount Fixed Floating*

$500 7.5% 1.2% $500 7.5% 1.5%

550 4.6 1.3 550 4.6 1.4

200 4.9 1.1 - - -

400 4.4 1.4 - - -

500 4.4 1.2 - - -

- - - 400 5.1 1.4

*Reflects floating interest rate accrued at the end of the year.

Leases

Assets held under capital leases are included in property and

equipment and are charged to depreciation and interest over the

life of the lease. Operating leases are not capitalized and lease

rentals are expensed. Rent expense on buildings, classified in

selling, general and administrative expense, includes percentage

rents that are based on a percentage of retail sales over stated

levels. Total rent expense was $183 million in 2003, $179 million in

2002 and $171 million in 2001. Most of the long-term leases include

options to renew, with terms varying from one to 30 years. Certain

leases also include options to purchase the property.

Future minimum lease payments required under noncancelable

lease agreements existing at January 31, 2004, were:

Future Minimum Lease Payments

Operating Capital(millions) Leases Leases

2004 $ 163 $ 21

2005 150 20

2006 136 19

2007 125 19

2008 111 19

After 2008 1,093 166

Total future minimum lease payments $1,778 $264

Less: Interest* (780) (106)

Present value of minimum lease payments $ 998 $158**

*Calculated using the interest rate at inception for each lease (the weightedaverage interest rate was 8.6 percent).

** Includes current portion of $9 million.

Income Taxes

Reconciliation of tax rates is as follows:

Tax Rate Reconciliation

2003 2002 2001

Federal statutory rate 35.0% 35.0% 35.0%

State income taxes, net of federal tax benefit 3.3 3.4 3.3

Dividends on ESOP stock (.2) (.2) (.1)

Work opportunity tax credits (.2) (.2) (.2)

Other (.1) .2 –

Effective tax rate 37.8% 38.2% 38.0%

The components of the provision for income taxes were:

Income Tax Provision: Expense

(millions) 2003 2002 2001

Current:

Federal $ 751 $ 663 $683

State 121 111 107

872 774 790

Deferred:

Federal 219 220 43

State 28 28 6

247 248 49

Total $1,119 $1,022 $839

The components of the net deferred tax asset/(liability) were:

Net Deferred Tax Asset/(Liability)

January 31, February 1,(millions) 2004 2003

Gross deferred tax assets:

Self-insured benefits $ 189 $ 188

Deferred compensation 241 184

Inventory 89 106

Accounts receivable valuation allowance 158 151

Postretirement health care obligation 42 42

Other 81 77

800 748

Gross deferred tax liabilities:

Property and equipment (938) (730)

Pension (218) (160)

Other (133) (98)

(1,289) (988)

Total $ (489) $(240)

Other Long-term Liabilities

In addition to deferred taxes discussed above, the major components

of other long-term liabilities at January 31, 2004 and February 1,

2003 included obligations for deferred compensation plan liabilities,

workers’ compensation/general liability costs, property related

liabilities and postretirement health care benefits. The increase in the

other long-term liability balance primarily represents increases in

deferred compensation plan liabilities and workers’ compensation/

general liability costs of $127 million and $34 million, respectively,

35

offset by a decrease in property related liabilities of $31 million. Our

current year postretirement health care and deferred compensation

plan activity is discussed below.

Stock Option Plans

We have stock option plans for key employees and non-employee

members of our Board of Directors. Our long-term incentive plans

provide for the granting of stock options, performance share

awards, restricted stock awards, or a combination of awards.

Performance share awards represent shares issuable in the future

based upon attainment of specified levels of future financial

performance. A majority of the awards are non-qualified stock

options that vest annually in equal amounts over a four-year

period. These options expire no later than ten years after the date

of the grant. Options granted to the non-employee members of

our Board of Directors vest after one year and have a ten-year

term. In early 2003, we stopped issuing new shares for our stock

option plan and began purchasing shares from the market. The

number of unissued common shares reserved for future grants

under the stock option plans was 19,279,658 at January 31, 2004

and 24,091,318 at February 1, 2003.

Options and Performance Share Awards Outstanding

Options

Total Outstanding Currently Exercisable PerformanceShares

Number of Average Number of Average Potentially(options and shares in thousands) Options Price* Options Price* Issuable

February 3, 2001 32,258 $ 19.30 18,662 $12.36 –

Granted 4,805 40.52

Canceled (437) 30.41

Exercised (5,311) 9.42

February 2, 2002 31,315 $24.07 17,629 $17.04 –

Granted 6,096 30.60 552

Canceled (561) 35.55

Exercised (2,063) 12.22

February 1, 2003 34,787 $25.73 21,931 $ 20.89 552

Granted 4,638 38.34 573

Canceled (407) 34.77

Exercised (2,859) 12.58

January 31, 2004 36,159 $28.28 23,689 $24.48 1,125

*Weighted average exercise price.

Options Outstanding

Options Outstanding Currently Exercisable

Range ofExercise Number Average Average Number Average

(options in thousands) Prices Outstanding Life** Price* Exercisable Price*

$ 5.53–$ 9.99 5,058 2.2 $ 7.79 5,058 $ 7.79

$10.00–$19.99 4,718 3.7 18.31 4,718 18.31

$20.00–$29.99 3,500 4.5 25.92 3,467 25.92

$30.00–$39.99 18,473 7.9 33.91 8,266 33.30

$40.00–$44.83 4,410 7.8 40.84 2,180 40.81

Total $ 5.53–$44.83 36,159 6.2 $28.28 23,689 $24.48

*Weighted average exercise price.

**Weighted average contractual life remaining in years.

In the first quarter of 2003, we adopted SFAS No. 123 in

accordance with the prospective transition method prescribed in

SFAS No. 148. The adoption of this method increased compensation

expense by less than $.01 per share in 2003. The requirements of

SFAS No. 123 and SFAS No. 148 are discussed in Management’s

Discussion and Analysis on page 24.

Awards granted in fiscal year 2002 and earlier will continue to

be accounted for under the intrinsic value method prescribed in APB

No. 25. No compensation expense related to options was recognized

because the exercise price of our employee stock options equaled

the market price of the underlying stock on the grant date. The

expense related to the intrinsic value of performance-based and

restricted stock awards issued was not significant to 2003 net

earnings, cash flows or financial position. The pro forma impact of

accounting for those awards at fair value will continue to be

disclosed until the last of those awards vest in January of 2007. If

we had elected to recognize compensation cost based on the fair

value of the awards at the grant date, net earnings would have

been the pro forma amounts shown below.

Pro Forma Earnings

(millions, except per share data) 2003 2002 2001

Net earnings—as reported $1,841 $1,654 $1,368

Stock-based employee compensation expense included in reported net earnings, net of tax 3 – –

Stock-based employee compensation expense determined under fair value based method, net of tax (35) (31) (28)

Net earnings—pro forma $1,809 $1,623 $1,340

Earnings per share:

Basic—as reported $ 2.02 $ 1.82 $ 1.52Basic—pro forma $ 1.99 $ 1.79 $ 1.49

Diluted—as reported $ 2.01 $ 1.81 $ 1.50Diluted—pro forma $ 1.97 $ 1.78 $ 1.47

The Black-Scholes model was used to estimate the fair value

of the options at grant date based on the following assumptions:

2003 2002 2001

Dividend yield .8% .8% .6%

Volatility 29% 35% 30%

Risk-free interest rate 3.0% 3.0% 4.3%

Expected life in years 5.0 5.0 5.0

Weighted average fair value at grant date $11.04 $10.07 $13.09

Defined Contribution Plans

Employees who meet certain eligibility requirements can participate

in a defined contribution 401(k) plan by investing up to 80 percent

of their compensation. We match 100 percent of each employee’s

contribution up to 5 percent of respective total compensation. Our

contribution to the plan is initially invested in Target Corporation

common stock. Benefits expense related to these matching

contributions was $117 million, $111 million and $97 million in 2003,

2002 and 2001, respectively.

36

In addition, we maintain other non-qualified, unfunded plans

that allow participants who are otherwise limited by qualified plan

statutes or regulations to defer compensation and earn returns

either tied to the results of our 401(k) plan investment choices or

market levels of interest rates. We manage the risk of offering

these retirement savings plans to this group of employees through

a variety of means, including investing in vehicles that offset a

substantial portion of our exposure to these returns. We recognized

benefits expense for these non-qualified plans of $86 million and

$11 million in 2003 and 2001, respectively, and income of $20 million

in 2002. Including the impact of these related investments, net

benefits expense resulting from these plans was $28 million,

$16 million and $15 million in 2003, 2002 and 2001, respectively.

We adjusted our position in some of these investment vehicles

resulting in the repurchase of 1.5 million, 0.5 million and 0.5 million

shares of our common stock in 2003, 2002 and 2001, respectively.

Additionally, during 2002, certain non-qualified pension and

survivor benefits owed to current executives were exchanged for

deferrals in a non-qualified plan and certain retired executives

accepted our offer to exchange our obligation to them in a frozen

non-qualified plan for deferrals in the plan. These exchanges

resulted in pre-tax net expense of $33 million ($.02 per share). In

2003, additional retired executives accepted our offer to exchange

our obligation to them in the frozen non-qualified plan for deferrals

in the plan, which resulted in a pre-tax net expense of $17 million

($.01 per share). We expect lower future expenses as a result of

these transactions because they were designed to be economically

neutral or slightly favorable to us.

Participants in our non-qualified plans deferred compensation

of $42 million, $35 million and $33 million in 2003, 2002 and 2001,

respectively.

Pension and Postretirement Health Care Benefits

We have qualified defined benefit pension plans that cover all

employees who meet certain age, length of service and hours

worked per year requirements. We also have unfunded non-

qualified pension plans for employees who have qualified plan

compensation restrictions. Benefits are provided based upon years

of service and the employee’s compensation. Retired employees

also become eligible for certain health care benefits if they meet

minimum age and service requirements and agree to contribute

a portion of the cost.

The Medicare Prescription Drug, Improvements and Modern-

ization Act of 2003 (the Act) was signed into law in December

2003. The Act introduces a prescription drug benefit under

Medicare as well as a federal subsidy to sponsors of retiree health

care benefit plans that provide a prescription drug benefit. The

accumulated benefit obligation and net periodic postretirement

benefit cost reflected in our financial statements do not incorporate

the effects of the Act. The accounting guidance has not been

finalized and we expect the Act to have a minimal impact on our

retirement plans.

Obligations and Funded Status at October 31, 2003

Pension BenefitsPostretirement

Non-qualified Health CareQualified Plans Plans Benefits

(millions) 2003 2002 2003 2002 2003 2002

Change in Benefit Obligation

Benefit obligation at beginning of measurement period $1,078 $1,014 $ 23 $ 53 $ 116 $ 114

Service cost 73 57 1 1 2 2

Interest cost 74 72 2 3 8 8

Actuarial loss 164 59 6 – 7 2

Benefits paid (56) (50) (3) (5) (10) (10)

Plan amendments – (74) – – – –

Settlement – – – (29) – –

Benefit obligation at end of measurement period $1,333 $1,078 $ 29 $ 23 $ 123 $ 116

Change in Plan Assets

Fair value of plan assets at beginning ofmeasurement period $1,058 $1,033 $ – $ – $ – $ –

Actual return on plan assets 203 (79) – – – –

Employer contribution 200 154 3 5 10 10

Benefits paid (56) (50) (3) (5) (10) (10)

Fair value of plan assets at end of measurement period $1,405 $1,058 $ – $ – $ – $ –

Funded status $ 72 $ (20) $(29) $(23) $(123) $(116)

Unrecognized actuarial loss 587 530 12 6 12 7

Unrecognized priorservice cost (65) (73) 3 3 1 1

Net amount recognized $ 594 $ 437 $(14) $(14) $(110) $(108)

Amounts recognized in the statements of financial position

consist of:

Pension BenefitsPostretirement

Non-qualified Health CareQualified Plans Plans Benefits

(millions) 2003 2002 2003 2002 2003 2002

Prepaid benefit cost $600 $441 $ – $ – $ – $ –

Accrued benefit cost (6) (4) (20) (20) (110) (108)

Intangible assets – – 3 4 n/a n/a

Accumulated OCI – – 3 2 n/a n/a

Net amount recognized $594 $437 $(14) $(14) $(110) $(108)

The accumulated benefit obligation for all defined benefit

pension plans was $1,237 million and $939 million at October 31,

2003 and 2002, respectively. The projected benefit obligation,

accumulated benefit obligation and fair value of plan assets for the

pension plans with an accumulated benefit obligation in excess of

plan assets were $34 million, $30 million and $1 million, respectively,

as of October 31, 2003 and $31 million, $25 million and $2 million,

respectively, as of October 31, 2002.

37

Net Pension and Postretirement Health Care Benefits Expense

PostretirementPension Benefits Health Care Benefits

(millions) 2003 2002 2001 2003 2002 2001

Service cost benefits earned during the period $74 $58 $50 $ 2 $ 2 $ 2

Interest cost on projected benefit obligation 75 75 69 8 8 8

Expected return on assets (114) (108) (89) – – –

Recognized losses 18 10 1 1 1 –

Recognized prior service cost (7) 1 1 – – –

Settlement/curtailment charges – (12) – – – –

Total $46 $24 $32 $11 $11 $10

The amortization of any prior service cost is determined using

a straight-line amortization of the cost over the average remaining

service period of employees expected to receive benefits under

the plan.

Assumptions

Weighted average assumptions used to determine benefit obligations

at October 31:

PostretirementPension Benefits Health Care Benefits

2003 2002 2003 2002

Discount rate 6.25% 7.00% 6.25% 7.00%

Average assumed rate of compensation increase 3.25% 4.00% n/a n/a

Weighted average assumptions used to determine net periodic

benefit cost for years ended October 31:

PostretirementPension Benefits Health Care Benefits

2003 2002 2003 2002

Discount rate 7.00% 7.25% 7.00% 7.25%

Expected long-term rate of return on plan assets 8.50% 9.00% n/a n/a

Average assumed rate of compensation increase 4.00% 4.25% n/a n/a

Our rate of return on qualified plans’ assets has averaged

5.4 percent and 9.6 percent per year over the 5-year and 10-year

periods ending October 31, 2003 (our measurement date). After

that date, we reduced our expected long-term rate of return on

plans’ assets to 8.0 percent per year.

An increase in the cost of covered health care benefits of

6.0 percent was assumed for 2003 and 2004. The rate is assumed

to remain at 6.0 percent in the future. The health care cost trend rate

assumption may have a significant effect on the amounts reported.

A one percent change in assumed health care cost trend rates

would have the following effects:

1% Increase 1% Decrease

Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $– $ –

Effect on the health care component of the postretirement benefit obligation $5 $(5)

Additional Information

Our pension plan weighted average asset allocations at October 31,

2003 and 2002 by asset category are as follows:

Asset Category

2003 2002

Equity securities 56% 54%

Debt securities 26 24

Real estate 5 5

Other 13 17

Total 100% 100%

Our asset allocation strategy for 2004 targets 55 percent in

equity securities, 25 percent in debt securities, 5 percent in real

estate and 15 percent in other assets. Equity securities include our

common stock in amounts substantially less than 0.5 percent of

total plan assets at October 31, 2003 and 2002. Other assets

includes private equity, mezzanine and distressed debt and timber.

Our expected long-term rate of return assumptions as of October 31,

2003 are 8.5 percent, 5.5 percent, 7.0 percent and 10.0 percent for

equity securities, debt securities, real estate and other assets,

respectively.

Contributions

Given the qualified pension plans’ funded position, we are not

required to make any contributions in 2004. In similar situations

in the past, we have chosen to make discretionary contributions

for various purposes, including minimizing Pension Benefit Guaranty

Corporation premium payments and maintaining the fully-funded

status of the plans. In 2004, such discretionary contributions could

range from $0 to $200 million. We expect to make contributions

in the range of $5 million to $15 million to our other postretirement

benefit plans in 2004.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future

service, as appropriate, are expected to be paid:

Pension PostretirementBenefits Health Care Benefits

2004 $ 59 $ 8

2005 62 9

2006 66 9

2007 70 10

2008 75 10

2009–2013 475 57

(millions)

38

Business Segment Comparisons

(millions) 2003 2002 2001 2000* 1999 1998

Revenues

Target $41,346 $36,917 $32,588 $29,278 $26,080 $23,014

Mervyn’s 3,553 3,816 4,027 4,142 4,087 4,140

Marshall Field’s 2,584 2,691 2,778 2,969 3,041 3,047

Other 680 493 433 462 449 434

Total revenues $48,163 $43,917 $39,826 $36,851 $33,657 $30,635

Pre-tax segment profit and earnings reconciliation

Target $ 3,467 $ 3,088 $ 2,546 $ 2,223 $ 2,022 $ 1,578

Mervyn’s 160 238 286 269 205 240

Marshall Field’s 107 135 133 190 296 279

Total pre-tax segment profit $ 3,734 $ 3,461 $ 2,965 $ 2,682 $ 2,523 $ 2,097

LIFO provision (expense)/credit 27 12 (8) (4) 7 18

Securitization adjustments:

Loss – – (67) – – (3)

Interest equivalent – – (27) (50) (49) (48)

Interest expense (559) (588) (473) (426) (459) (442)

Mainframe outsourcing – – – – (5) (42)

Other (242) (209) (183) (149) (148) (69)

Earnings before income taxes $ 2,960 $ 2,676 $ 2,207 $ 2,053 $ 1,869 $ 1,511

Assets

Target $25,525 $22,752 $18,515 $14,348 $12,048 $10,475

Mervyn’s 2,243 2,270 2,379 2,270 2,248 2,339

Marshall Field’s 2,153 2,202 2,284 2,114 2,149 2,123

Other 1,471 1,379 976 758 698 729

Total assets $31,392 $28,603 $24,154 $19,490 $17,143 $15,666

Depreciation and amortization

Target $ 1,055 $ 925 $ 784 $ 660 $ 567 $ 496

Mervyn’s 106 122 126 131 138 138

Marshall Field’s 115 125 135 133 133 135

Other 44 40 34 16 16 11

Total depreciation and amortization $ 1,320 $ 1,212 $ 1,079 $ 940 $ 854 $ 780

Capital expenditures

Target $ 2,690 $ 2,966 $ 2,901 $ 2,244 $ 1,665 $ 1,352

Mervyn’s 145 110 104 106 108 169

Marshall Field’s 141 105 125 143 124 127

Other 28 40 33 35 21 9

Total capital expenditures $ 3,004 $ 3,221 $ 3,163 $ 2,528 $ 1,918 $ 1,657

Segment net assets and shareholders’ equity reconciliation

Target $19,514 $17,491 $13,812 $10,659 $ 8,413 $ 7,302

Mervyn’s 1,757 1,749 1,868 1,928 1,908 2,017

Marshall Field’s 1,754 1,822 1,764 1,749 1,795 1,785

Other 675 636 477 463 428 470

Total net assets $23,700 $21,698 $17,921 $14,799 $12,544 $11,574

Securitized receivables – – – (753) (753) (753)

Marketable securities 244 357 84 – – 44

Current portion of long-term debt and notes payable (866) (975) (905) (857) (498) (256)

Long-term debt (10,217) (10,186) (8,088) (5,634) (4,521) (4,452)

Deferred income taxes and other (1,796) (1,451) (1,152) (1,036) (910) (846)

Total shareholders’ equity $11,065 $ 9,443 $ 7,860 $ 6,519 $ 5,862 $ 5,311

Each operating segment’s assets and operating results include accounts receivable and receivable-backed securities held by Target Receivables Corporationand Retailers National Bank, as well as related income and expense.

*Consisted of 53 weeks.

39

Quarterly Results (Unaudited)

The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. The table below

summarizes results by quarter for 2003 and 2002:

First Quarter Second Quarter Third Quarter Fourth Quarter Total Year

(millions, except per share data) 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002

Total revenues $10,322 $ 9,594 $10,984 $10,068 $11,286 $10,194 $15,571 $14,061 $48,163 $43,917

Gross margin (a) $ 3,255 $ 3,014 $ 3,428 $ 3,151 $ 3,498 $ 3,148 $ 4,810 $ 4,149 $14,991 $13,462

Net earnings $ 349 $ 345 $ 358 $ 344 $ 302 $ 277 $ 832 $ 688 $ 1,841 $ 1,654

Basic earnings per share (b) $ .38 $ .38 $ .39 $ .38 $ .33 $ .31 $ .91 $ .76 $ 2.02 $ 1.82

Diluted earnings per share (b) $ .38 $ .38 $ .39 $ .38 $ .33 $ .30 $ .91 $ .75 $ 2.01 $ 1.81

Dividends declared per share (b) $ .060 $ .060 $ .070 $ .060 $ .070 $ .060 $ .070 $ .060 $ .270 $ .240

Closing common stock price (c)

High $ 33.44 $ 45.72 $ 39.82 $ 44.94 $ 41.54 $ 37.25 $ 40.15 $ 35.74 $ 41.54 $ 45.72

Low $ 26.06 $ 41.45 $ 33.06 $ 30.46 $ 37.55 $ 26.15 $ 37.05 $ 27.00 $ 26.06 $ 26.15

(a) Gross margin is sales less cost of sales. Gross margin for first and second quarter have been adjusted to reflect the impact of EITF No. 02-16 reclassificationsfor those periods of $36 million and $31 million, respectively.

(b) Per share amounts are computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount dueto the impact of changes in average quarterly shares outstanding.

(c) Our common stock is listed on the New York Stock Exchange and Pacific Exchange. At March 22, 2004, there were 17,582 registered shareholders andthe closing common stock price was $44.22 per share.

Mervyn’s Store Count Marshall Field’s Store Count

No. of Retail Sq. Ft.Stores (in thousands)

Arizona 15 1,205

California 126 9,783

Colorado 11 853

Idaho 1 82

Louisiana 6 450

Michigan 15 1,165

Minnesota 9 1,159

Nevada 7 512

New Mexico 3 267

Oklahoma 3 268

Oregon 7 554

Texas 42 3,345

Utah 8 754

Washington 13 1,177

Total 266 21,574

No. of Retail Sq. Ft.Stores (in thousands)

Illinois 17 4,908

Indiana 2 243

Michigan 21 4,828

Minnesota 12 3,069

North Dakota 3 295

Ohio 1 187

South Dakota 1 100

Wisconsin 5 816

Total 62 14,447

40

Report of Independent Auditors

Board of Directors and Shareholders

Target Corporation

We have audited the accompanying consolidated statements of

financial position of Target Corporation and subsidiaries as of

January 31, 2004 and February 1, 2003 and the related consolidated

results of operations, cash flows and shareholders’ investment for

each of the three years in the period ended January 31, 2004. These

financial statements are the responsibility of the Corporation’s

management. Our responsibility is to express an opinion on these

financial statements based on our audits.

We conducted our audits in accordance with auditing stan-

dards generally accepted in the United States. Those standards

require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of

material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting

principles used and significant estimates made by management,

as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above

present fairly, in all material respects, the consolidated financial

position of Target Corporation and subsidiaries at January 31, 2004

and February 1, 2003 and the consolidated results of their

operations and their cash flows for each of the three years in the

period ended January 31, 2004 in conformity with accounting

principles generally accepted in the United States.

Minneapolis, Minnesota

February 19, 2004

Report of Management

Management is responsible for the consistency, integrity and

presentation of the information in the Annual Report. The consoli-

dated financial statements and other information presented in this

Annual Report have been prepared in accordance with accounting

principles generally accepted in the United States and include

necessary judgments and estimates by management.

To fulfill our responsibility, we maintain comprehensive systems

of internal control designed to provide reasonable assurance that

assets are safeguarded and transactions are executed in accordance

with established procedures. The concept of reasonable assurance

is based upon a recognition that the cost of the controls should

not exceed the benefit derived. We believe our systems of internal

control provide this reasonable assurance.

The Board of Directors exercises its oversight role with respect

to the Corporation’s systems of internal control primarily through

its Audit Committee, which is comprised of five independent

directors. The Committee oversees the Corporation’s systems of

internal control, accounting practices, financial reporting and audits

to assess whether their quality, integrity and objectivity are

sufficient to protect shareholders’ investments. The Committee’s

report appears on this page.

In addition, our consolidated financial statements have been

audited by Ernst & Young LLP, independent auditors, whose report

also appears on this page. As a part of its audit, Ernst & Young LLP

develops and maintains an understanding of the Corporation’s

internal accounting controls and conducts such tests and employs

such procedures as it considers necessary to render its opinion on

the consolidated financial statements. Their report expresses an

opinion as to the fair presentation, in all material respects, of the

consolidated financial statements and is based on independent

audits made in accordance with auditing standards generally

accepted in the United States.

Robert J. Ulrich Douglas A. Scovanner

Chairman of the Board and Executive Vice President and

Chief Executive Officer Chief Financial Officer

February 19, 2004

Report of Audit Committee

The Audit Committee met six times during fiscal 2003 to review

the overall audit scope, plans for internal and independent audits,

the Corporation’s systems of internal control, emerging accounting

issues, audit fees and benefit plans. The Committee also met

individually with the independent auditors, without management

present, to discuss the results of their audits. The Committee

encourages the internal and independent auditors to communicate

closely with the Committee.

Audit Committee results were reported to the full Board of

Directors and the Corporation’s annual financial statements were

reviewed and approved by the Board of Directors before issuance.

The Audit Committee also recommended to the Board of Directors

that the independent auditors be reappointed for fiscal 2004,

subject to the approval of the shareholders at the annual meeting.

February 19, 2004

41

Directors

Roxanne S. AustinFormer Executive Vice President, HughesElectronics Corporation andFormer President and Chief Operating Officer of its subsidiary, DIRECTV, Inc.1, 2, 7

Calvin DardenSenior Vice President, U.S. Operations, United Parcel Service of America, Inc.1, 7

Roger A. EnricoRetired Chairman and Chief Executive Officer,PepsiCo, Inc.1, 3, 7

William W. GeorgeFormer Chairman and Chief Executive Officer,Medtronic, Inc.1, 2, 4, 7

Elizabeth HoffmanPresident, University of Colorado System1, 7

Michele J. HooperFormer Chief ExecutiveOfficer and President,Voyager Expanded Learning1, 2, 6, 7

James A. JohnsonVice Chairman, Perseus, LLC1, 3, 4, 5, 7

Richard M. KovacevichChairman and Chief Executive Officer, Wells Fargo & Co.1, 2, 6, 7

Executive Officers

Linda L. AhlersPresident, Marshall Field’s

Todd V. BlackwellExecutive Vice President,Human Resources, Assets Protection, AMC

Bart ButzerExecutive Vice President,Stores, Target Stores

Michael FrancisExecutive Vice President,Marketing

John D. GriffithSenior Vice President,Property Development

James T. HaleExecutive Vice President,General Counsel andCorporate Secretary (Retiring June 2004)

Diane L. NealPresident, Mervyn’s

Luis PadillaExecutive Vice President,Merchandising,Marshall Field’s

Douglas A. ScovannerExecutive Vice President and Chief Financial Officer

Paul L. SingerSenior Vice President,Technology Services andChief Information Officer

Gregg W. SteinhafelPresident, Target Stores

Gerald L. StorchVice Chairman

Ertugrul TuzcuExecutive Vice President,Store Operations, Marshall Field’s

Robert J. UlrichChairman and Chief Executive Officer

DIRECTORS AND MANAGEMENT

Anne M. MulcahyChairman and Chief Executive Officer, Xerox Corporation1, 4, 5, 7

Stephen W. SangerChairman and Chief Executive Officer,General Mills, Inc.1, 3, 5, 6, 7

Warren R. StaleyChairman and Chief Executive Officer,Cargill, Inc.1, 4, 5, 7

George W. TamkePartner, Clayton, Dubilier & Rice, Inc.1, 2, 3, 6, 7

Solomon D. TrujilloChief Executive Officer,Orange SA1, 3, 4, 5, 7

Robert J. UlrichChairman and Chief Executive Officer,Target Corporation andTarget Stores1

1 Executive Committee

2 Audit Committee

3 Compensation Committee

4 Corporate Responsibility

Committee

5 Finance Committee

6 Nominating Committee

7 Corporate Governance

Committee

Other Officers

Timothy R. BaerSenior Vice President, Law,General Counsel-Designate

Nathan K. GarvisVice President, Government Affairs

Susan D. KahnVice President, Investor Relations

Tracy KofskiVice President, Total Compensation

Stephen C. KowalkeVice President and Treasurer

Richard J. KuzmichPresident, AssociatedMerchandising Corp.

Dale NitschkePresident, target.direct

Terrence J. ScullyPresident, Target Financial Services

Laysha WardVice President, Community Relations

Jane P. WindmeierSenior Vice President,Finance

42

Transfer Agent, Registrar and Dividend Disbursing Agent

Mellon Investor Services

Shareholder Assistance

For assistance regarding individual stock records, lost certificates,

name or address changes, dividend or tax questions, call Mellon

Investor Services at 1-800-794-9871, access their Web site at

www.melloninvestor.com, or write to:

Mellon Investor Services

P.O. Box 3315

South Hackensack, NJ 07606-1915

Direct Stock Purchase/Dividend Reinvestment Plan

Mellon Investor Services administers a direct service investment

plan that allows interested investors to purchase Target Corporation

stock directly, rather than through a broker, and become a

registered shareholder of the Company. The program offers many

features including dividend reinvestment. For detailed information

regarding this program, call Mellon Investor Services toll free at

1-800-842-7629 or write to:

Mellon Investor Services

P.O. Box 3338

South Hackensack, NJ 07606-1938

Trustee, Employee Savings 401(k) and Pension Plans

State Street Bank and Trust Company

Stock Exchange Listings

Trading symbol: TGT

New York Stock Exchange and Pacific Stock Exchange

SHAREHOLDER INFORMATION

Annual Meeting

The Annual Meeting of Shareholders is scheduled for May 19,

2004, at 9:30 a.m. CDT at The Children’s Theatre, 2400 Third

Avenue South, Minneapolis, Minnesota.

Shareholder Information

Quarterly and annual shareholder information, including the Form

10-Q and Form 10-K Annual Report, which are filed with the

Securities and Exchange Commission, is available at no charge to

shareholders. To obtain copies of these materials, you may call

612-761-6736, send an email to Investorrelations@target.com, or

write to: Vice President, Investor Relations (TPN-1448), Target

Corporation, 1000 Nicollet Mall, Minneapolis, Minnesota 55403.

These documents as well as other information about Target

Corporation, including our Business Conduct Guide, Corporate

Governance Profile and Board of Directors’ Committee Position

Descriptions, are also available on the internet at www.target.com.

Sales Information

Comments regarding the company’s sales results are provided

periodically throughout the year on a recorded telephone

message. You may access this message by calling 612-761-6500.

Target, The Bullseye Design, SuperTarget, Expect More. Pay Less., Marshall Field’s, Field’s, Archer Farms, Market Pantry, Merona, Xhilaration, Room Essentials,

Club Wedd, Target Rewards, Take Charge of Education, Ready. Sit. Read!, Field’s Go Read! and Target House are registered trademarks of Target Brands, Inc.

Mervyn’s, Community Closet, and Go Places, Read. are registered trademarks of Mervyn’s Brands, Inc. Amy Coe is a trademark of Amy Coe, Inc. Calphalon

is a trademark of Calphalon Corporation. Start Something is a trademark of the Tiger Woods Foundation. Mossimo is a trademark of Mossimo, Inc. Liz Lange

is a trademark of Elizabeth Lange, Inc. Isaac Mizrahi is a trademark of IM Ready Made, LLC. Bialetti is a registered trademark of Bialetti Industrie S.P.A.

Waverly is a registered trademark of F. Schumacher & Co. Genuine Kids is a trademark of Oshkosh B’Gosh, Inc. Coca-Cola and Design is a registered

trademark of the Coca-Cola Company. Charmin and Tide are registered trademarks of the Procter & Gamble Company. Michael Graves is a trademark of

Michael Graves & Associates, Inc. Woolrich is a registered trademark of John Rich & Sons Investment Holding Company. VISA is a trademark of Visa

International Service Association. Harvard Business Review is a registered trademark of the Presidents and Fellows of Harvard University. Virgin Pulse is a

trademark of Virgin Enterprises, Ltd. Sony Liv is a trademark of Sony Corporation. Sonia Kashuk is a trademark of Sonia Kashuk, Inc. House Beautiful is a

trademark of Hearst Corporation. The Nike “Swoosh” Design is a registered trademark of Nike, Inc. All rights reserved.

Copyright 2004 Target Corporation Co

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